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DESCRIPTION  OF  INDUSTRY 


AN  INTRODUCTION  TO  ECONOMICS 


BY 

HENRY  C.  ADAMS,  PH.D.,  LLD. 

PROFESSOR  OF  POLITICAL  ECONOMY  AND  FINANCE  AT  THE 
UNIVERSITY  OF  MICHICAN 


NEW  YORK 

HENRY  HOLT  AND  COMPANY 

1918 


CONTENTS 

CHAPTER  I 
WORK 

PAQB 

§  1.  The  Nature  of  Work 3 

a.  Its  definition 3 

b.  Not  hound  up  with  pain 4 

c.  Mental  and  physical  work 5 

d.  Co-operative  in  character 6 

§  2.  Organization  through  Division  of  Labor 7 

§  3.  Meaning  of  Industrial  Society 10 

a.  The  co-operative  product 11 

b.  The  directing  intelligence 12 

c.  The  element  of  time 13 

§  4.  Bastiat's  Picture  of  Co-operative  Work 16 

CHAPTER    II 

CLASSIFICATION  OF  INDUSTRIES 

§  5.  The  Fundamental  Classification 20 

§  6.  The  Extractive  Industries 22 

a.  Agriculture *. 22 

b.  AqiiacuUure 23 

c.  Mining 23 

d.  Forestration 24 

§  7.  The  Manufacturing  Industries 25 

a.  Classification  by  output 25 

b.  Classifi^xition  by  material  v^ed 27 

c.  Classification  by  elements  of  cost 28 

§  8.  The  Carrying  Industries 28 

a.  The  service  of  merchants 28 

b.  The  transportation  service 30 

c.  The  service  of  banks 30 

§  9.  The  Business  of  Buting  and  Selling 32 

V 


vi  CONTENTS 

CHAPTER  III 
THE  LEGAL  FRAMEWORK  OF  INDUSTRY 

PAGE 

§  10.  The  Princplb  op  Libertt 34 

§  11.  Classification  op  Legal  Adjdstmbnts 36 

§  12.  Law  of  Property 38 

a.  Property  in  land 39 

b.  Property  in  capital 40 

c.  Property  in  organization 41 

d.  Property  in  consumable  goods 41 

§  13.  Law  of  Personal  Liberty 42 

a.  Individtml  freedom 43 

b.  Equality  oj  opportunity 45 

c.  Numbers  and  movement 45 

d.  Voluntary  association 47 

§  14.  Statutes  Imposing  Conditions  of  Work 49 

a.  Laws  which  prescribe  conditions 49 

b.  Laws  which  provide  for  supervisory  control 51 

c.  Laws  which  provide  for  administrative  control 52 

i  15.  Government  as  Protector 52. 

a.  Protection  against  aggression  from  without 53 

b.  Protection  from  violence  within 54 

c.  Protection  of  contracts 55 

CHAPTER  IV 

FACTORS  OF  PRODUCTION 

§  16.  The  Factors, — Land  and  Capital 65 

§  17.  Meaning  of  Land 57 

§  18.  The  Law  of  Return  from  Land 59 

a.  Proof  of  the  law 62 

b.  Results  of  the  law 63 

c.  Criticism  of  the  law 64 

§  19.  The  Law  of  Rent 65 

§  20.  Meaning  of  Capital 71 

a.  Improvements  in  land 73 

b.  Manufacturing  machinery 73 

c.  Property  used  in  transportation 74 

d.  Stock  awaiting  sale 74 

e.  Organization 76 


CONTENTS  vii 

PAGK 

f .  Training  for  industrial  service 76 

g.  Is  money  capital? 77 

21.  Capital  Maintenance  and  Capital  Building 78 

a.  Maintenance  of  capital 78 

b.  Capital  building 80 

22.  The  Law  of  Return  from  Capital 82 

CHAPTER  V 
MACHINERY  IN  INDUSTRY 

23.  The  Industrial  Revolution 85 

a.  Control  of  power 86 

b.  The  changed  point  of  vieio 87 

24.  Steps  in  the  Development  of  Machine  Industry.  ...  88 

25.  The  Development  of  Steam  Transportation 92 

26.  Measurement  of  Increased  Efficiency 94 

27.  Some  Results  of  the  Industrial  Revolution 98 

a.  Reclassification  of  society 98 

b.  Corporate  organization  of  business 100 

c.  Organization  of  wage-earners 100 

CHAPTER  VI 
MOTIVE  IN  INDUSTRY 

28.  Waists  as  Motives  to  Work 102 

a.  Analysis  of  wants 103 

b.  The  law  of  wants 105 

29.  The  Law  of  Effort 106 

a.  Fact  of  decreasing  desires 106 

b.  Fact  of  increasing  fatigue 107 

c.  Desire  for  money  an  exception 108 

30.  Organization  of  Motives 110 

a.  Marks  of  a  well-adjusted  business Ill 

b.  Comparative  study  of  motive  in  industry Ill 

c.  Lesson  taught  by  the  comparison 116 

CHAPTER  VII 
CONTROL  IN  INDUSTRY 

31.  Statement  of  the  Question 118 

32.  Marks  of  a  Successful  Industrial  Organization 120 


viu  CONTENTS 

PAGE 

a.  The  placement  of  men 120 

b.  The  adjustment  of  production 124 

c.  The  application  of  effort 127 

d.  Comparative  costs 128 

e.  Justice  in  industry 130 

§  33.  Evils  of  Competition 132 

a.  The  wastes  of  competition 132 

b.  The  unstable  character  of  industry 134 

c.  Useless  investments  of  capital 136 

CHAPTER  VIII 

THE  MARKET 

§  34.  General  Description  of  a  Market 138 

§  35.  Characteristics  of  the  Modern  Market 139 

a.  Retail  stores 140 

b.  Wholesale  dealers 141 

c.  Demand  measured  through  the  market 142 

d.  The  nalional  market 144 

e.  Market  for  staples 145 

f.  The  stock  market 146 

§  36.  The  Machinery  of  the  Market 148 

a.  A  monetary  system 149 

b.  A  banking  system 149 

c.  Organization  of  intelligence 150 

d.  Machinery  of  transportation 152 

§  37.  The  Market  and  the  Productive  Process 152 

CHAPTER  IX 

THE  LAWS  OF  PRICE 

§  38.  Statement  of  the  Question 156 

§  39.  The  Market  Price 158 

a.  Purpose  of  price 158 

b.  Demand  and  supply 159 

c.  The  competition  of  goods 161 

d.  The  effect  of  different  standards  of  living 163 

§  40,  Normal  Price 164 

§  41.  Monopoly  Price 168 

§  42.  Speculative  Price 172 


CONTENTS  uc 

CHAPTER  X 
THE  MONEY  SYSTEM  OF  EXCHANGES 

PAQE 

§  43.  The  Functions  of  Money 176 

a.  Money  as  a  medium  of  exchange 177 

b.  Money  as  a  measure  of  value 178 

c.  Money  as  a  standard  of  deferred  payments 180 

§  44.  Money  Material 181 

§  45.  Coined  Money 184 

a.  Kinds  of  coins 185 

b.  Form  of  coins 187 

c.  Rule  of  free  coinage 189 

d.  Laws  of  legal  tender 190 

§  46.  Paper  Money 191 

a.  Bank  notes 191 

b.  Treasury  notes 194 

c.  Certificates  of  deposit 195 

§  47.  Money  Principles 196 

a.  The  value  of  money 196 

b.  Gresham's  Law 197 

c.  The  diffu,sion  of  money 199 

§  48.  The  United  States  Money  System 200 

CHAPTER  XI 

THE  CREDIT  SYSTEM  OF  EXCHANGES 

§  49.  The  Nature  op  the  Banking  Business 202 

§  50.  The  Exchange  Function  of  Banks 206 

a.  Exchanges  by  means  of  checks  and  drafts 206 

b.  Exchanges  through  bank  discounts 212 

CHAPTER  XII 

SHARING  THE  PRODUCT 

§  61.  Statement  of  the  Question 216 

§  52.  The  Production  Contract 219 

§  53.  The  Secondary  Distribution  Groups 223 

a.  Incomes  derived  from  direct  service 224 

b.  Income  derived  from  rents 226 

c.  Speculative  and  monopoly  incomes 228 

§  54.  Summary  op  the  Analysis 229 


z '  CONTENTS 

CHAPTER  XIII 
BUSINESS  INTEGRATION 

PAGE 

§  55.  Business  Units 233 

a.  Partnership 233 

b.  Corporations ,  235 

c.  Trusts  and  holding  companies 239 

§  56.  Organization  for  Bargaining 241 

a.  Labor  organizations 242 

b.  Employers'  associations 244 

CHAPTER  XIV 

GOVERNMENT  AND  INDUSTRY 

§  57.  Factory  Legislation 248 

§  58.  Enforcement  of  Competition 251 

§  59.  Exclusion  of  Competition 253 

§  60.  Supervision  of  Competition 255 

§  61.  Other  Avenues  op  Influence 257 

a.  Services  that  must  be  universal 258 

b.  Services  that  must  be  standardized 258 

c.  Industrial  significance  of  taxes 259 

§  62.  Conclusion 262 


DESCRIPTION  OF  INDUSTRY 


CHAPTER  I 
WORK 

"A  body  is  said  to  be  well  organized  when  each  part  has  its  own 
work  to  perform,  when  by  performing  this  work  it  contributes  to  the 
well-being  of  the  whole,  so  that  any  stopping  of  this  work  injures  the 
whole;  while,  on  the  other  hand,  each  part  depends  for  its  own  well- 
being  on  the  efficient  working  of  the  other  parts." — Marshall. 

This  book  undertakes  to  describe  the  business  world, 
and  to  explain  the  rules  and  principles  that  control  men 
as  citizens  in  that  world.  The  badge  of  citizenship  in  the 
business  world  is  work.  Everyone  who  lives  must  live 
from  work,  for  there  is  no  other  way  of  producing  those 
things  that  support  life  or  that  contribute  to  the  com- 
forts and  pleasures  of  living.  While  work  may  not  be, 
and  should  not  be,  the  chief  end  of  living,  it  is  the  chief 
occupation  in  life.  It  is  for  this  reason  that  a  study  of  the 
nature  of  work,  of  the  conditions  under  which  men  work, 
and  of  the  rules  and  principles  according  to  which  efficient 
work  may  be  done,  is  a  highly  important  study.  To  un- 
derstand the  business  world  is  a  significant  part  of  educa- 
tion. 

§  1.  The  Nature  of  Work. — The  nature  of  work  will 
be  adequately  presented  by  considering  four  points  re- 
specting it. 

(a)  Its  Definition. — That  work  is  bound  up  with  energy 
and  efifort  is  the  common  experience  of  all;  but  not  all 
effort  and  energy  is  work.  Work  is  a  means  to  an  end;  it 
is  not  an  end  in  itself.  This  distinction  will  be  clear  when 
it  is  seen  that  an  expenditure  of  effort  and  energy  may  be 

S 


4  DESCRIPTION  OF  INDUSTRY 

either  work_or_play  according  to  the  conditions  under 
which  it  is  made,  or  the  reasons  for  which  it  is  undertaken. 
When  boys  play  ball,  for  example,  they  put  forth  a  large 
amount  of  effort  and  energy,  but  this  is  not  work.  They 
play  for  fun,  they  do  not  play  for  pay.  It  is  not  a  means 
by  which  they  secure  an  income.  The  physical  pleasure 
of  action  and  the  mental  pleasure  of  emulation  is  all  the 
pay  they  ask.  When,  however,  a  member  of  the  American 
League  plays  ball  he  does  so  for  the  money  paid  him  as  a 
player.  When  he  receives  money  for  playing,  he  is  no 
longer  an  amateur;  he  becomes  a  professional  ball  player. 
He  is  a  worker  and  as  much  a  member  of  the  business 
world  as  a  man  who  digs  coal  in  a  mine,  who  drives  a 
locomotive,  who  clerks  in  a  store,  or  who  follows  the  call- 
ing of  a  teacher. 

From  this  illustration,  and  many  others  will  suggest 
themselves,  one  significant  fact  is  disclosed  with  regard 
to  work.  (The  word  covers  all  effort,  energy,  or  activity 
put  forth  as  a  means  to  an  end,  that  end  being  the  attain- 
ment of  an  income.^ 

(b)  Not  Bound  y^with  Pain, — It  is  commonly  said  that 
work  is  bound  up  with  pain,  but  this  assumption  is  not 
quite  correct.  Some  kinds  of  work  are  painful.  All  kinds 
of  work  may  be  painful  under  some  conditions;  but  the 
pleasure  that  comes  with  mental  and  physical  effort,  when 
one  feels  strength  and  vigor,  is  quite  the  same  whether 
the  effort  is  work  or  play.  The  difference  is  that  effort 
put  forth  as  an  end  may  be  stopped  when  one  has  had 
enough;  while  work,  effort  put  forth  for  an  end  and  under 
the  pressure  of  an  organized  service,  is  seldom  stopped 
this  side  of  exhaustion. 

The  idea  that  work  is  painful  and  on  that  account  to  be 


WORK  5 

shunned,  grew  up  because  workers  have  been  driven,  or 
drive  themselves,  beyond  the  limit  of  endurance.  When 
one  rises  in  the  morning  refreshed  by  healthful  sleep,  he 
feels  ready  for  anything.  He  goes  to  work  and  for  a  time 
his  work  is  a  pleasure.  As  the  hours  pass,  and  he  has 
spent  the  freshness  of  his  vitaUty,  he  begins  to  know  that 
he  is  working.  He  is  conscious  that  his  muscles  and  nerves 
need  prodding.  He  is  inclined  to  stop  because  he  has  had 
enough. 

This,  however,  is  not  the  way  of  the  business  world. 
Work  commonly  continues  until  the  last  hour  of  the  work- 
ing day.  Then  work  brings  pain  and  only  the  lashing  of 
the  will  keeps  the  weary  mind  and  body  up  to  the  mark. 
This  picture  of  the  working  day  is,  of  course,  a  figure  of 
speech,  but  it  makes  clear  the  fact  that,  while  work  in 
itself  is  not  painful,  we  have  come  to  think  of  it  as  bound 
up  with  pain,  because  we  remember  only  the  pain  that 
comes  with  over-work.  If  a  decree  should  go  forth  that  all 
men  must  play  for  twelve  hours  a  day,  and  for  six  days 
in  a  week,  they  would,  at  the  close  of  a  century,  hate  play 
worse  than  they  now  hate  work.  Even  school  boys  get 
tired  of  too  much  vacation. 

This  explanation  of  the  desire  to  shun  work  is  of  con- 
siderable importance,  for  one  who  desires  to  know  the 
true  nature  of  work,  and  this  is  as  far  as  we  care  to  carry 
the  analysis  at  this  time. 

(c)  Mental  and  Physical  Work. — In  speaking  of  work  we 
commonly  hold  in  mind  physical  effort,  but  mental  effort 
put  forth  for  industrial  ends  is  also  work.  Indeed,  a  close 
study  will  show  that  the  two  kinds  of  work  cannot  be 
separated.  All  physical  activity  requires  some  degree  of 
mental  effort,  and  all  mental  effort  is  bound  up  with  some 


6  DESCRIPTION  OF  INDUSTRY 

degree  of  physical  activity.  Work  is  called  mental  or 
physical  according  as  the  one  or  the  other  of  these  two 
kinds  of  effort  is  predominant. 

This  distinction  between  mental  and  physical  work  is 
made  primarily  for  our  convenience  in  the  study  of  in- 
dustrial matters.  The  work  of  the  physician,  the  legisla- 
tor, the  teacher,  or  the  preacher  is  called  mental  work. 
The  management  of  an  industry,  whether  great  or  small, 
falls  in  the  same  class.  On  the  other  hand,  carpenters, 
masons,  and  all  men  who  follow  trades,  are  classed  as 
physical  workers.  The  same  is  true  of  farmers,  miners, 
employees  of  railways,  and  the  Hke.  The  impression  to 
be  gleaned  from  this  paragraph  is,  that  the  common  dis- 
tinction between  mental  and  physical  work  is  of  slight 
importance.  Both  classes  of  workers  are  citizens  of  the 
business  world,  and  both  must  be  considered  in  a  study  of 
industry. 

(d)  Co-operative  in  Character. — Another  fact  respecting 
the  kind  of  work  one  sees  in  the  business  world  is  that  it 
is  co-operative.  No  man  makes  all  the  things  he  requires 
to  sustain  his  life  or  to  give  him  pleasure.  On  the  con- 
trary, he  works  at  a  particular  trade,  or  gives  all  his  time 
to  some  particular  factory,  or  follows  some  particular 
profession  or  calling.  In  short,  the  work  of  every  member 
of  the  business  world  is  special  in  character.  Every  man 
produces  more  of  that  which  he  makes  than  he  can  pos- 
sibly consume,  and  he  does  so  day  after  day,  and  year 
after  year.  This  he  is  safe  in  doing  because  he  knows  that 
what  he  makes  can  be  sold,  and  that  with  the  proceeds 
of  the  sale  he  can  buy  other  things  that  he  does  not  make. 

This  means  that  every  worker  who  confines  himself 
to  a  single  Une  of  work,  does  so  with  the  understanding 


WORK  7 

that  other  workers  will  produce  other  lines  of  goods  and 
that  by  exchange  of  goods  between  all  Workers,  each  can 
satisfy  his  many  and  varied  wants. 

§  2.  Organization  Through  Division  of  Labor. — The 
foregoing  paragraph  reads  as  though  each  worker  owned 
the  product  of  his  work,  and  kept  for  himself  the  proceeds 
of  its  sale.  This,  of  course,  is  not  the  case.  The  modem 
industrial  world  is  a  highly  organized  affair.  One  feature 
of  this  organization  consists  in  the  separation  of  workers 
into  groups  and  the  assignment  of  some  particular  task 
to  each  group  or  individual  within  the  group.  The  com- 
bined result  of  work  done  in  this  way  is  a  continuous  flow 
of  consumable  goods  of  all  kinds  and  sorts;  that  is  to  say, 
of  those  products  that  minister  to  the  many  and  varied 
wants  of  men.  The  relation  thus  established  between 
co-operative  workers  creates  what  is  called  industrial 
society, — a  result  of  the  extensive  application  of  the  prin- 
ciple of  division  of  labor. 

One  feature  of  the  organization  of  workers  under  the 
influence  of  the  principle  of  division  of  labor  is  found  in 
the  many  kinds  and  grades  of  industries  that  together 
make  up  the  business  world.  Agriculture,  Manufacturing, 
and  Transportation  may  be  named  as  grand  divisions  of 
industry,  and  many  iudependent  lines  of  production  are 
to  be  found  within  the  boundaries  of  each  division.  Every 
productive  process,  in  its  turn,  is  separated  into  business 
units  which  stand  for  groups  of  organized  workers.  The 
production  of  cotton  goods  may  serve  for  an  illustration. 
Here  we  have  the  growers  of  the  raw  cotton;  the  brokers 
and  the  railways  who  collect  and  carry  the  cotton  bales 
to  the  factory;  the  factory  which  manufactures  the  raw 
wtton  into  eloth;  the  distribution  of  the  cloth  by  the 


8  DESCRIPTION  OF  INDUSTRY 

wholesale  dealers  to  the  retail  dealers;  and,  finally,  the 
sale  of  the  cloth  by  the  retail  dealers  to  the  thousands  of 
customers  for  whom  it  was  made.  In  this  illustration, 
six  independent  lines  of  business  are  combined  to  furnish 
consumers  with  cotton  goods. 

The  application  of  the  principle  of  division  of  labor  may 
be  seen  also  in  the  organization  of  each  particular  business. 
Every  business  unit  shows  as  many  groups  of  workers  as 
there  are  clearly  defined  kinds  of  work.  The  manufacture 
of  furniture,  for  example,  calls  for  the  selection  and  prep- 
aration of  the  lumber,  the  sawing  to  pattern,  the  carving 
or  turning,  the  assembling  of  parts,  the  painting  or  finish- 
ing of  the  product.  In  large  plants  the  arrangement  of 
the  buildings  as  well  as  the  assignment  of  workers  to 
working  groups,  shows  the  co-operative  character  of  work 
within  the  factory  grounds.  An  independent  worker  in  a 
factory  is  impossible. 

Even  within  the  factory  group,  the  results  of  the  prin- 
ciple of  division  of  labor  may  be  seen.  Each  group  worker 
may  be  assigned  a  different  task  and  confine  himself  to 
the  performance  of  that  task.  In  the  paint  shop  of  our 
furniture  factory,  for  example,  one  workman  may  have 
charge  of  finishing  mahogany,  one  of  cherry,  one  of  maple, 
while  to  others  may  be  given  the  task  of  finishing  painted 
furniture.  Specialization  of  the  same  sort  will  be  found 
in  the  other  groups  of  workers.  But  the  important  fact 
is  that  the  work  which  each  workman  does  fits  in  with 
what  other  workmen  do  and  the  result  of  this  combined 
work  is  the  finished  factory  product. 

It  thus  appears  that  the  principle  of  division  of  labor  is 
responsible  for  the  manner  in  which  the  productive  process 
is  organized.    It  first  breaks  up  industry  into  a  large  numj- 


WORK  9 

ber  of  business  units,  such  as  the  growing  of  wheat,  the 
mining  of  coal,  the  manufacture  of  shoes,  the  selling  of 
groceries,  and  the  like.  In  the  second  place,  it  breaks  up 
these  large  units  into  groups  of  workers,  and  assigns  to 
each  group  a  specific  task  in  the  process  of  production. 
And,  finally,  specialization  of  work  within  the  several 
groups  is  under  the  control  of  the  principle  of  division  of 
labor.  Organization  through  specialization  is  the  watch- 
word of  modern  industrial  methods. 

The  advantages  that  accrue  on  account  of  specialization 
in  work,  are  many.  It  develops  eflBciency  and  skill  on  the 
part  of  individual  workmen  and  by  this  means  increases 
both  the  quantity  and  the  quality  of  current  production. 
It  calls  for  an  analysis  of  the  various  processes  of  produc- 
tion, and  thus  leads  to  the  invention  of  labor-saving 
machinery.  It  provides  an  opportunity  for  men  of  peculiar 
gifts  to  do  the  kind  of  work  for  which  they  are  best  fitted. 
It  makes  general  the  benefits  of  varying  climates,  soil, 
mineral  deposits,  and  the  like.  In  short,  it  makes  the 
industrial  process  a  single  process,  in  which  each  individual 
finds  the  place  where  he  can  do  the  best  for  himself  and 
for  the  community,  and  in  which  Nature's  gifts,  although 
localized  on  the  earth's  surface,  are  made  general  for  all. 
It  is,  of  course,  true  that,  at  any  particular  time,  the  prin- 
ciple of  division  of  labor  is  limited  in  its  application,  and 
that  some  of  the  results  of  the  way  in  which  this  principle 
works  are  unfortunate.  This,  however,  is  nothing  against 
the  principle  as  such.  It  means  rather  that  the  perfect 
industrial  organization  has  not  yet  been  worked  out. 
Our  present  lesson  is  that  modem  industrial  eflBciency 
rests  on  organization,  and  business  organization  in  its 
turn  is  a  result  of  the  principle  of  division  of  labor. 


10  DESCRIPTION  OF  INDUSTRY 

§  3.  Meaning  of  Industrial  Society. — It  is  usual  for 
writers  to  use  the  phrase  industrial  society  rather  than 
business  world,  when  explaining  the  manner  in  which 
the  workers  of  the  world  are  bound  together.  This  phrase 
makes  clear  the  fact  that  the  idea  of  a  business  world  is 
something  more  than  that  of  an  individual  at  work. 
Robinson  Crusoe,  while  alone  on  his  island,  occupied  most 
of  his  time  in  getting  and  fashioning  those  things  nec- 
essary to  sustain  life  and  to  gain  some  degree  of  comfort 
in  living;  but  Robinson  Crusoe,  with  his  fishing,  his  plant- 
ing, his  herding,  and  his  building,  was  not  an  industrial 
society.  The  point  is  that  work,  as  it  exists  among  peoples 
who  have  progressed  beyond  primitive  conditions,  is  done 
by  groups  of  workers  organized  under  well-established 
and  well-known  conditions.  We  cannot  understand  the 
modem  business  world  if  we  confine  our  attention  to 
individuals.  We  must  think  of  men  as  members  of  groups 
of  workers,  and  of  these  groups  as  held  together  by  some 
bond  of  common  interest.  iWe  must  think  of  them  as 
forming  an  industrial  society. 

i  Society  may  be  defined  as  a  union  of  men  in  unity  of 
purpose.  ^  There  are  as  many  societies  as  there  are  kinds 
of  purposes  or  aims  that  lead  men  to  act  together.  An 
organization  for  the  control  and  management  of  school 
athletics  is  a  society.  So  is  a  church,  or  the  political  union 
of  men  which  makes  the  State.  Industrial  society  stands 
for  the  union  of  men  organized  for  the  production  and 
purchase  of  those  things  that  minister  to  the  necessities, 
the  comforts,  and  the  luxuries  of  life,  or  which  in  any 
way  satisfy  what  is  called  our  economic  wants.  It  is  a 
little  difficult  to  grasp  this  idea  of  co-operative  work  as 
distinct  from  individual  work.     As  a  help  to  such  an 


WORK  11 

understanding,  three  facts  will  be  mentioned,  designed  to 
show  the  difference  between  work  done  individually  and 
work  done  by  groups  industrially  organized. 

(a)  The  Co-operative  Product. — The  total  amount  of  well- 
being,  so  far  as  that  depends  on  the  production  and  pur- 
chase of  the  products  of  work,  is  increased  many  fold  by 
the  fact  that  men  work  co-operatively  rather  than  in- 
dividually. Assume,  for  the  purpose  of  illustration,  a 
conmiunity  composed  of  10,000  men,  and  that  each  man 
working  by  himself  can  produce  in  a  year  one  x  wealth. 
The  aggregate  amount  of  wealth  produced  would  be 
10,000  X  wealth.  Suppose  now  this  same  number  of  men 
to  work  as  a  well-organized  and  well-administered  body 
of  workers;  that  many  of  these  men  are  specialists  and 
work  together  for  the  production  of  some  particular 
things,  which  they  offer  in  exchange  for  things  produced 
by  other  workers;  the  amount  of  wealth  produced  under 
such  conditions  would  be  far  in  excess  of  the  10,000  x 
which  resulted  when  each  man  in  the  community  en- 
deavored to  satisfy  his  personal  wants  by  his  own  labor. 
The  product  of  10,000  men  organized  as  a  body  of  indus- 
trial workers,  might  be  30,000  x  wealth,  the  difference, 
or  20,000  X  wealth,  being  the  result  of  co-operation. 

It  is  the  extent  to  which  team  work,  organized  work, 
speciaUzed  work,  is  carried  on  that  makes  the  industrial 
world  of  to-day  so  different  from  that  of  centuries  ago. 
The  fact  that  all  work  is  now  co-operative  is  the  secret  of 
the  enormous  growth  of  wealth  in  modem  times.  Even 
machinery  and  capital,  of  which  we  hear  so  much,  is  the 
result  of  co-operative  industrial  effort.  The  lesson  to 
be  learned  from  this  paragraph  is,  that  the  manner  in 
which  men  work  is  of  more  importance,  so  far  as  results 


12  DESCRIPTION  OF  INDUSTRY 

are  concerned,  than  the  fact  that  work  is  done.  To  under- 
stand the  industrial  organization,  and  to  know  the  place 
which  each  worker  holds  in  that  organization,  are  the 
primary  aims  of  a  study  of  industrial  society. 

(b)  The  Directing  Intelligence. — A  second  fact  that  helps 
to  explain  co-operative  work  is  that  organized  industry 
seems  to  have  an  intelligence  far  beyond  the  intelligence 
of  the  men,  or  specialized  groups  of  men,  of  whom  indus- 
trial society  is  made  up.  The  wonderful  thing  about  the 
business  world  is,  that  some  one  somewhere  knows  the 
wants  of  every  man  and  is  working  to  make  the  particular 
thing  that  is  able  to  satisfy  those  wants.  A  cowboy  in 
Texas  wants  a  dipper  and  he  buys  it  at  some  cross-roads 
store.  This  dipper  is  made  by  a  tinsmith  in  St.  Louis, 
who  buys  the  tin  of  a  factory  located  in  Indiana.  For 
the  manufacture  of  tin,  sheet  iron  is  needed,  which  is 
procured  from  Pittsburg  where  iron  is  manufactured.  To 
make  iron,  ore  is  needed  which  comes  from  the  mines  in 
Minnesota.  How  does  the  man  who  digs  ore  in  Minnesota 
know  that  the  cowboy  in  Texas  wants  a  dipper? 

Or  perhaps  the  Minnesota  miner  wants  a  woolen  shirt, 
which  he  buys  at  the  company  store.  The  shirt  is  made 
by  a  clothier  in  St.  Paul  out  of  flannel  manufactured  in 
Massachusetts,  out  of  wool  grown  in  Argentina.  How 
does  the  sheep  herder  in  Argentina  know  that  the  miner 
in  Minnesota  wants  a  flannel  shirt? 

Or,  to  turn  the  illustration  about,  a  physician  in  London 
prescribes  beef  tea  for  an  invalid,  and  the  cook  is  told  to 
buy  some  beef  to  make  the  tea.  This  beef,  procured  from 
a  London  marketer,  is  cut  from  a  quarter  of  beef  that 
once  roamed  the  plains  of  Texas  and  was  herded  by  our 
cowboy  who  bought  the  dipper.    How  does  the  cowboy 


WORK  U 

know  that  an  invalid  in  London  will  be  in  need  of  a  cap 
of  beef  tea? 

Most  things  appear  simple  until  we  try  to  explain  them. 
The  answer  to  the  questions  asked  above  is,  that  the 
Minnesota  miner  does  not  know  that  the  Texas  cowboy 
wants  a  dipper.  The  Argentina  herder  does  not  know  that 
the  Minnesota  miner  wants  a  flannel  shirt.  The  Texas 
cowboy  does  not  know  that  the  London  invalid  wants  a 
cup  of  beef  tea.  No  one  who  works  to  make  things  for  the 
market  knows  by  whom  they  are  to  be  consumed.  There 
are  millions  of  groups  of  workers  making  things  that  will 
be  consumed  by  hundreds  of  millions  of  people  diffused 
through  many  lands.  The  producer  does  not  know  the 
consumer,  nor  does  he  need  to  know  him.  There  seems 
to  be  in  industrial  society  an  intelligence  that  works 
automatically  and  adjusts  the  amount  and  kind  of  things 
that  workers  produce  to  the  needs  and  whims  of  those 
for  whom  the  goods  are  made.  This  is  a  remarkable 
situation.  It  makes  yet  more  clear  the  fact  that  the  work- 
ing organization  which  we  call  industrial  society  is  some- 
thing more  than  a  mere  aggregation  of  workers.  It  is  an 
organization  guided  by  an  intelligence  that  eliminates 
useless  work,  and  encourages  useful  work.  How  this  is 
accomplished  will  be  explained  in  the  chapter  that  treats 
of  Control  of  Industry.  For  the  present,  the  lesson  of 
this  paragraph  is  that,  in  order  to  understand  the  business 
world,  we  must  think  of  industrial  society  as  though  it 
possessed  a  peculiar  intelligence  of  its  own.  The  rules 
according  to  which  this  intelligence  works,  provided  these 
can  be  discovered  and  expressed,  are  what  Political  Econ- 
omists call  the  natural  laws  of  the  business  world. 

(c)  The  Element  of  Time. — A  third  fact  may  be  men- 


14  DESCRIPTION  OF  INDUSTRY 

tioned  which  throws  yet  added  light  on  the  character  of 
the  modem  industrial  world.  In  primitive  industry,  the 
time  between  the  beginning  and  the  end  of  a  productive 
process  was  very  short;  in  modern  industry,  years  may 
intervene  before  a  product  is  finished  and  made  ready  for 
consumption.    An  illustration  will  make  this  clear. 

So  far  as  primitive  industry  is  concerned,  the  matter  is 
very  simple.  A  savage  on  the  shore  of  a  tropical  island 
feels  the  need  of  food;  he  walks  to  a  grove  and  having 
selected  a  ripe  banana,  plucks  it,  eats  it,  and  returns  to 
sleep  on  the  bed  of  sand  that  the  waves  have  spread.  The 
period  of  time  covered  by  this  cycle  of  industrial  events, — 
the  want,  the  work,  and  the  satisfaction, — ^may  be  half  an 
hour. 

An  inland  savage  in  the  Temperate  Zone  is  not  so  fa- 
vored by  nature.  Here  the  seasons  determine  the  harvest, 
and  the  work  demanded  is  to  gather  in  the  Fall  what  is  to 
be  consumed  during  the  Winter.  In  this  case,  the  cycle 
of  industrial  events  covers  a  period  of  four  or  five  months. 
The  wants  of  the  future  are  foreseen,  and  present  work  is 
done  to  provide  for  future  satisfaction. 

Neither  of  these  cases,  however,  carries  the  idea  of  co- 
operative work,  and  in  both  cases  the  amount  of  satisfac- 
tion is  limited  by  what  Nature  gratuitously  gives.  Let 
us  assume  that  new  wants  have  come  into  existence,  such 
as  the  want  of  clothing  and  of  shelter,  and  that  the  indus- 
trial process  has  developed  far  enough  to  make  clear  to  the 
worker  that  these  new  wants  can  be  satisfied  with  less 
work  if  part  of  the  working  time  is  given  to  the  making 
of  tools  and  machines  with  which  to  work.  A  tool  may 
last  for  twenty  years,  and  each  year  of  its  use  it  lightens 
the  work  of  him  who  made  it.   It  permits  the  worker  either 


WORK  15 

to  satisfy  his  wants  with  less  labor,  or  to  so  use  his  labor 
as  to  satisfy  a  larger  range  of  wants. 

Let  it  be  assumed,  further,  that  the  conditions  of  in- 
dustry have  so  changed  that  our  worker  is  a  member  of  a 
working  group,  and  that  industrial  intelligence  has  grown 
far  enough  to  permit  all  workers  to  see  that  the  product 
of  the  same  working  time  will  be  increased  by  specializa- 
tion, that  is  to  say:  by  dividing  the  work  up  between  them. 
Before  this  can  happen  it  is,  of  course,  necessary  that  the 
wants  of  workers  have  grown  far  beyond  the  simple  wants 
of  coarse  food  and  rude  shelter.  A  variety  of  wants  must 
be  felt  before  workers  will  organize  their  work  according 
to  the  principle  of  division  of  labor.  The  point,  however, 
is  that  when  this  stage  of  industrial  development  is 
reached,  the  element  of  time  enters  in  as  a  condition  of 
fruitful  work  in  every  Une  of  labor. 

This  is  true  for  several  reasons,  two  of  which  may  be 
named  here.  When  a  man,  or  groups  of  men,  speciaUze 
in  producing  a  given  thing,  that  commodity  or  product 
must  be  made  in  large  amoimts,  and  must  pass  through 
the  market  in  order  to  be  sold.  This  takes  time.  The 
period  between  production  and  consumption, — or  what 
we  have  termed  the  cycle  of  industrial  events  made  up  of 
wants,  work,  and  satisfaction, — is  not  completed  until  the 
goods  are  in  the  hands  of  the  consumer. 

Again,  since  production  is  made  up  of  a  series  of  in- 
dependent processes,  eachj)rocgss^aust^^mpleted  for 
a  large  output  before  the  process  that  follows  can  be  begun. 
This  also  means  time.  In  the  making  of  woolen  cloth,  for 
example,  the  sheep  must  be  raised;  the  wool  must  be 
sheared  and  rough  washed;  it  must  then  be  carried  to 
the  factory  where  it  is  scoured  and  sorted;  it  is  then  spun 


16  DESCRIPTION  OF  INDUSTRY 

and  woven,  dyeing  also  being  an  independent  process;  it  is 
then  carried  to  the  wholesaler,  where  it  Ues  until  purchased 
by  a  retailer,  who  keeps  it  until  purchased  by  the  consumer. 
Even  then  it  is  not  ready  for  use  until  it  is  made  up  by  the 
tailor  into  a  suit  for  the  consumer.  Three,  four,  or  possibly 
five  years  may  intervene  between  the  birth  of  a  lamb  and 
the  donning  of  a  coat. 

Cases  may  be  named  in  the  modern  industrial  world  in 
which  fifty  or  an  hundred  years  intervene  between  the 
doing  of  the  work  and  the  time  when  the  wants  of  all  who 
are  consumers  are  satisfied  as  the  result  of  that  work.  The 
citizens  of  Jackson  and  Grand  Rapids,  for  example,  want 
electric  power  for  making  light.  This  power  is  produced 
at  a  dam  on  the  Ausable  River.  One  cannot  say  how  long 
this  dam  will  last.  It  may  be  fifty,  or  it  may  be  an  hun- 
dred years,  but  as  long  as  it  lasts,  it  will  continue  to  de- 
liver power.  A  cycle  of  industrial  events  may  cover  many 
generations. 

The  full  meaning  of  time  as  an  industrial  factor  cannot 
be  here  considered.  The  point  of  present  importance  is 
that  no  description  of  industrial  society  can  be  made  which 
does  not  recognize  time  as  a  condition  of  eflficient  produc- 
tion. 

§  4.  Bastiat's  Picture  of  Co-operative  Work. — One  of 
the  great  writers  of  the  last  century  was  a  Frenchman 
by  the  name  of  Frederic  Bastiat.  He  thought  he  was 
writing  about  men  as  workers;  in  fact,  he  always  wrote 
from  the  point  of  view  of  organization.  The  quotation 
which  follows  paints  a  word  picture  of  what  industrial 
society  means  for  an  individual  worker.  It  will  help  to 
make  clear  what  co-operative  work  means.  ^ 
*  This  was  written  in  1850. 


WORK  17 

"Rousseau  has  said:  'Much  philosophy  is  wanted  for 
the  correct  observation  of  things  which  are  before  our 
eyes.*  And  such  are  the  social  phenomena  in  the  midst 
of  which  we  live  and  move.  Habit  has  so  familiarized 
us  with  these  phenomena  that  we  cease  to  observe  them, 
unless  something  striking  and  exceptional  forces  them 
on  our  attention. 

"  Let  us  take,  by  way  of  illustration,  a  man  in  the  humble 
walks  of  life — a  village  carpenter,  for  instance, — and 
observe  the  various  services  he  renders  to  society,  and  re- 
ceives from  it;  we  shall  not  fail  to  be  struck  with  the 
enormous  disproportion  which  is  apparent. 

"This  man  employs  his  day's  labor  in  planing  boards, 
and  making  tables  and  chests  of  drawers.  He  complains 
of  his  condition;  yet  in  truth  what  does  he  receive  from 
society  in  exchange  for  his  work? 

"First  of  all,  on  getting  up  in  the  morning,  he  dresses 
himself;  and  he  has  himself  personally  made  none  of  the 
numerous  articles  of  which  his  clothing  consists.  Now, 
in  order  to  put  at  his  disposal  this  clothing,  simple  as  it  is, 
an  enormous  amount  of  labor,  industry,  and  locomotion, 
and  many  ingenious  inventions,  must  have  been  employed. 
Americans  must  have  produced  cotton,  Indians  indigo, 
Frenchmen  wool  and  flax,  Brazilians  hides;  and  all  these 
materials  must  have  been  transported  to  various  towns 
where  they  have  been  worked  up,  spun,  woven,  dyed,  etc. 

"Then  he  breakfasts.  In  order  to  procure  him  the 
bread  which  he  eats  every  morning,  land  must  have  been 
cleared,  enclosed,  labored,  manured,  sown;  the  fruits  of 
the  soil  must  have  been  preserved  with  care  from  pillage, 
and  security  must  have  reigned  among  an  innumerable 
multitude  of  people;  the  wheat  must  have  been  cut  down, 


18  DESCRIPTION  OF  INDUSTRY 

ground  into  flour,  kneaded,  and  prepared ;  iron,  steel,  wood, 
stone,  must  have  been  converted  by  industry  into  in- 
struments of  labor;  some  men  must  have  employed 
animal  force,  others  water  power,  etc. ;  all  matters,  of  which 
each,  taken  singly,  presupposes  a  mass  of  labor,  whether 
we  have  regard  to  space  or  time,  of  incalculable  amount. 

"In  the  course  of  the  day  this  man  will  have  occasion  to 
use  sugar,  oil,  and  various  other  materials  and  utensils. 

"He  sends  his  son  to  school,  there  to  receive  an  educa- 
tion, which,  although  Umited,  nevertheless  implies  anterior 
study  and  research,  and  an  extent  of  knowledge  which 
startles  the  imagination. 

"He  goes  out.    He  finds  the  street  paved  and  lighted. 

"A  neighbor  goes  to  law  with  him.  He  finds  advocates 
to  plead  his  cause,  judges  to  maintain  his  rights,  oflBcers  of 
justice  to  put  the  sentence  in  execution;  all  which  implies 
acquired  knowledge,  and,  consequently,  intelligence  and 
means  of  subsistence. 

"  He  goes  to  church.  It  is  a  stupendous  monument,  and 
the  book  which  he  carries  thither  is  a  monument,  perhaps 
still  more  stupendous,  of  human  intelligence.  He  is  taught 
morals,  he  has  his  mind  enlightened,  his  soul  elevated;  and 
in  order  to  this  we  must  suppose  that  another  man  had 
previously  frequented  schools  and  libraries,  consulted  all 
the  sources  of  human  learning,  and  while  so  employed  had 
been  able  to  Uve  without  occupying  himself  directly  with 
the  wants  of  the  body. 

"If  our  artisan  undertakes  a  journey,  he  finds  that,  in 
order  to  save  him  time  and  exertion,  other  men  have  re- 
moved and  levelled  the  soil,  filled  up  valleys,  hewed  down 
mountains,  united  the  banks  of  rivers,  diminished  friction, 
placed  wheeled  carriages  on  blocks  of  sandstone  or  bands 


WORK  19 

of  iron,  and  brought  the  force  of  animals  and  the  power 
of  steam  into  subjection  to  human  wants. 

"It  is  impossible  not  to  be  struck  with  the  measureless 
disproportion  which  exists  between  the  enjoyments  which 
this  man  derives  from  society  and  what  he  could  obtain 
by  his  own  unassisted  exertions.  I  venture  to  say  that  in  a 
single  day  he  consumes  more  than  he  could  himself  produce 
in  ten  centuries. 

"What  renders  the  phenomenon  still  more  strange  is, 
that  all  other  men  are  in  the  same  situation.  Every  in- 
dividual member  of  society  has  absorbed  millions  of  times 
more  than  he  could  himself  produce;  yet  there  is  no  mutual 
robbery.  And,  if  we  regard  things  more  nearly,  we  per- 
ceive that  the  carpenter  has  paid,  in  services,  for  all  the 
services  which  others  have  rendered  to  him.  If  we 
bring  the  matter  to  a  strict  reckoning,  we  shall  be  convinced 
that  he  has  received  nothing  which  he  has  not  paid  for  by 
means  of  his  modest  industry;  and  that  everyone  who,  at 
whatever  interval  of  time  or  space,  has  been  employed 
in  his  service,  has  received,  or  will  receive,  his  remunera- 
tion. 

"The  social  mechanism,  then,  must  be  very  ingenious 
and  very  powerful,  since  it  leads  to  this  singular  result, 
that  each  man,  even  he  whose  lot  is  cast  in  the  humblest 
condition,  has  more  enjoyment  in  one  day  than  he  could 
himself  produce  in  many  ages." 


CHAPTER  II 
CLASSIFICATION  OF  INDUSTRIES 

"One  of  the  most  remarkable  phenomena  presented  to  the  student 
of  Economics  is  the  ignorance  of  all  sorts  of  persons  as  to  their  place 
and  function  in  the  industrial  world." — ^Taussig. 

Our  first  step  in  the  analysis  of  the  business  world  will 
be  to  classify  the  industries  that  compose  it.  The  purgpse 
of  classification  is  twofold.  In  the  first  place,  it  will  enable 
us  to  gain  a  bro^djview  of  the  entire  field  of  industry.  By 
means  of  classification  there  will  be  disclosed  to  each  worker 
his  place  in  the  world  of  industry,  and  his  relation  to  and 
dependence  upon  other  workers  or  groups  of  workers.  The 
significance  of  co-operative  work  will  thus  be  made  yet 
more  clear.  In  the  second  place,  fruitful  observation  of 
what  is  going  on  in  the  business  world  will  be  greatly 
aided  by  bringing  together  in  groups  industries  of  the  same 
class.  In  no  other  way  is  it  possible  to  compare  one  kind 
of  industry  with  another,  to  understand  how  they  are  knit 
together  in  a  single  business  world,  and  to  perceive  that 
they  are  controlled  by  a  uniform  set  of  business  principles 
and  rules.  Classification  is  the  first  step  in  scientific  ob- 
servation. 

§  5.  The  Fundamental  Classification. — ^A  satisfactory 
classification  of  any  line  of  facts  must  rest  on  some  ele- 
ment common  to  them  all.  The  only  element  common 
to  all  lines  of  productive  work,  is  the  value  of  the  product 
created  or  of  the  service  rendered.  What  value  is,  why 
some  things  have  value  and  other  things  equally  useful 

20 


CLASSIFICATION  OF  INDUSTRIES  21 

do  not,  why  some  things  that  have  value  can  be  sold  for 
more  at  one  time  than  at  another;  these  and  other  similar 
questions  will  be  studied  later.  For  the  present,  it  is 
enough  to  know  that  the  chief  purpose  of  industrial  work 
istQjcreate  money  value;  that  is  to  say,  to  produce  goods 
that  can  be  sold,  or  to  render  services  for  which  a  price 
will  be  paid.  The  kind  of  work  involved  in  making  the 
various  sorts  of  marketable  goods,  or,  what  amounts  to 
the  same  thing,  the  kind  of  value  which  results  from  pro- 
ductive labor,  will  be  accepted  as  the  basis  for  the  classi- 
fication of  industries  first  submitted. 

There  are  three  lines  of  industries  which  contribute  use- 
ful things  that  are  bought  and  sold  upon  the  market. 
These  are: 

The  Extractive  Industries,  which  have  to  do  with  get- 
ting the  material  out  of  which  useful  things  are  made, 

The  Manufacturing  Industries,  which  have  to  do  with 
the  fashioning  of  that  material  so  as  to  bring  it  into  a  usable 
shape  or  form  or  condition,  and, 

The  Canying  Industries,  which  have  to  do  with  bringing 
things,  whether  raw  material  or  completed  products,  from 
where  they  are  not  wanted  to  where  they  are  wanted  and 
can  be  used. 

It  is  sometimes  said  that  the  Extractive  Industries 
create  a  value  of  acquisition  or  possession;  that  the  Manu- 
facturing Industries  create  a  value  of  forai;  and  that  the 
Carrying  Industries  create  a  value  of  place.  If  these 
phrases  are  used  merely  to  draw  a  line  between  the  three 
kinds  of  work  above  described,  and  are  not  used  to  explain 
the  "nature"  or  "source  "  of  value,  they  can  do  no  harm 
and  may  be  of  help.  They  do  suggest  in  a  very  clear  man- 
ner the  essential  difference  which  exists  between  agricul- 


22  DESCRIPTION  OF  INDUSTRY 

ture,  manufactures,  and  transportation,  regarded  as  the 
three  comprehensive  branches  of  industry. 

There  is  another  line  of  work  which  does  not  seem  to  be 
covered  by  the  above  grouping  of  industries.  This  is  the 
work  of  rendering  a  direct  service;  that  is  to  say,  a  service 
useful  in  itself,  and  for  which  men  are  willing  to  pay,  but 
which  does  not  show  itself  in  the  increased  value  of  any 
particular  thing.  The  service  rendered  by  a  lawyer,  a 
physician,  a  judge,  a  lawmaker,  are  illustrations  of  this 
kind  of  industrial  work.  As  a  matter  of  fact,  most  serv- 
ices that  seem  on  their  face  to  be  indirect,  do  afifect  the 
value  of  some  material  things;  and  this  class  of  industrial 
work,  which,  for  convenience,  may  be  called  the  "profes- 
si^s,"  is  less  signij&cant  in  an  analysis  of  industrial  society 
than  at  first  appears  to  be  the  case.  This  fourth  group  of 
industrial  workers  is  mentioned  rather  to  make  our  classi- 
fication of  business  pursuits  a  complete  classification, 
than  because  it  is  necessary  to  give  much  attention  to 
professional  or  personal  services  in  an  elementary  book. 
It  is  enough,  for  the  present,  to  draw  a  clear  picture  of 
that  part  of  the  business  world  that  has  to  do  with  the  pro- 
duction and  the  sale  of  material  things. 

§  6.  The  Extractive  Industries. — ^All  extractive  indus- 
tries fall  under  one  of  the  four  general  heads  of  Agricul- 
ture, Aquaculture,  Mining,  and  Forestration;  the  more 
common  words  are  Farming,  Fishing,  Mining,  and  Lum- 
bering. 

(a)  AgricuUure. — ^Agriculture  is  a  familiar  word.  It 
includes  all  forms  of  cultivation,  from  cattle  grazing  on 
wild  lands  to  market  gardening  on  land  worth  a  thousand 
dollars  an  acre.  Where  hunting  and  trapping  are  im- 
portant occupations,  the  definition  of  agriculture  must  be 


CLASSIFICATION  OF  INDUSTRIES  23 

extended  to  include  these  forms  of  work.  The  herding  of 
sheep,  horses,  cattle,  and  the  like,  as  practiced  by  nomadic 
peoples  is  an  agricultural  pursuit.  Agriculture,  as  we  now 
commonly  use  the  word,  is  the  primitive  industry  of  all 
peoples  who  have  bound  themselves  to  a  particular  spot, 
calling  that  their  home.  It  is  the  industry  upon  which 
all  other  industries  rest,  and  on  that  account  is  of  funda- 
mental importance. 

(b)  A  guaculture. — ^Aquaculture  is  not  a  well-estabUshed 
word.  It  is  here  used  to  suggest  the  second  class  of  ex- 
tractive industries,  and  includes  all  those  lines  of  work 

(which  take  from  the  water,  or  cultivate  under  the  water, 
things  which  have  a  market  value.  )Foods,  metals,  jewels, 
fabrics,  fibers, — ^indeed,  practically  all  of  the  kinds  of 
goods  drawn  from  the  air  or  the  earth  can  be  obtained  in 
some  form  from  the  water.  Aquaculture  is  in  its  possi- 
bilities second  only  to  agriculture  as  furnishing  an  op- 
portunity for  workers.  Unless  the  present  tendency  to 
the  increase  of  population  be  in  some  way  checked,  it 
will,  in  the  years  to  come,  claim  an  ever  increasing  share 
of  the  attention  of  industrial  workers. 

(c)  Mining. — The  industry  of  Mining  requires  no  de- 
scriptive definition.  Mining  differs  from  agriculture  in 
that  the  work  involved  has  nothing  to  do  with  the  growth 
of  the  product.  It  is  strictly  confined  to  the  gathering 
or  the  extracting  of  what  nature  unaided  has  produced. 
The  farmer  is  said  to  produce  the  crop  which  he  gathers 
at  the  harvest.  The  miner,  in  this  sense,  produces  noth- 
ing; he  is  merely  the  harvester  of  a  product.  To  use  lan- 
guage accurately,  the  commodity  which  he  places  on  the 
market  for  sale  is  not  a  "product,"  but  an  "output." 
The  distinction  between  agriculture  and  mining  which 


24  DESCRIPTION  OF  INDUSTRY 

these  words  suggest,  is  a  real  distinction.  The  point  is 
that  the  farmer  must  put  back  into  the  soil  all  that  he 
takes  out  in  the  form  of  product;  otherwise,  he  would 
exhaust  the  soil.  He  must  also  keep  the  soil  in  a  condi- 
tion to  enable  plants  to  take  material  from  the  air.  The 
miner  cannot  restore  to  the  earth  what  he  takes  out;  nor 
can  his  work  in  any  way  increase  product.  Although  his 
labor  adds  to  the  goods  on  the  market,  it  tends  in  so  doing 
to  exhaust  the  resources  of  the  nation.  Agriculture  is  an 
industry  that  can  go  on  forever;  mining  must  stop  when 
all  the  minerals  are  taken  from  the  earth. 

This  distinction  between  farming  and  mining  goes  far 
to  explain  the  different  ways  in  which  these  two  indus- 
tries are  treated  by  the  government.  In  the  matter  of 
taxation,  for  example,  mines  and  farms  are  commonly 
taxed  according  to  different  principles.  Another  illustra- 
tion is  found  in  the  fact  that  when  lands  containing  min- 
erals are  sold  for  farmmg  purposes,  the  government  fre- 
quently reserves  all  mineral  rights.  Our  general  theory 
is  that  the  title  to  land  carries  with  it  ownership  to  the 
center  of  the  earth,  but  an  exception  is  frequently  made 
in  the  case  of  land  supposed  to  contain  minerals.  One 
who  wishes  to  understand  the  business  world,  must  con- 
sider the  industry  of  mining  as  a  class  by  itself. 

(d)  Forestration. — It  is  common  to  regard  forestration 
as  a  peculiar  form  of  industry.  As  practiced  in  this  coun- 
try, it  is  essentially  similar  to  that  of  mining;  that  is  to 
say,  the  forests,  the  growth  of  perhaps  an  hundred  or  two 
hundred  years,  are  cut,  and  no  steps  are  taken  for  restora- 
tion by  the  planting  of  young  trees.  In  many  European 
countries,  however,  forestration  is  like  farming,  with  a 
harvest  every  thirty  or  forty  years.    The  general  fact 


CLASSIFICATION  OF  INDUSTRIES  25 

seems  to  be  that  what  may  be  called  the  tree  crop  will 
not  mature  within  the  productive  life  of  an  individual, 
and  for  that  reason  men  are  not  inclined  to  plant  forests, 
although  the  timber  when  grown,  cut,  and  marketed,  has 
a  high  value.  Only  corporations  that  do  not  die,  whether 
industrial  corporations  like  railways  and  insurance  com- 
panies, or  political  corporations  like  the  states  and  the 
Federal  government,  are  warranted  in  making  invest- 
ments in  this  sort  of  commercial  ventures.  It  is  this  fact 
that  makes  it  proper  to  regard  forestration  as  a  distinct 
industry.  It  is  an  extractive  industry;  but,  in  view  of  its 
peculiar  character,  it  cannot  be  grouped  either  with  agri- 
culture or  with  mining. 

§  7.  The  Manufacturing  Industries. — The  service  of 
the  manufacturing  worker  is  to  change  the  raw  material 
into  a  form  suitable  for  use.  The  making  of  cloth  out  of 
cotton  or  of  wool,  the  making  of  furniture  out  of  wood, 
the  making  of  breakfast  foods  out  of  wheat  or  of  corn, 
the  making  of  wine  out  of  grapes,  the  making  of  medi- 
cines out  of  chemicals,  are  all  illustrations  of  the  manu- 
facturing process.  Ordinarily,  the  finished  product  has  a 
greater  value  than  the  material  out  of  which  that  product 
is  made,  and  the  value  thus  added  to  the  material  is  called 
the  value  of  form.  The  material,  having  been  adapted 
to  the  needs  and  wants  of  men,  will  commonly  sell  for 
more  as  a  finished  product  than  in  an  unfinished  condi- 
tion. This  fact  suggests  clearly  how  manufacturing  labor 
is  useful  to  the  manufacturer  and  why  it  commands  a  price. 

(a)  Classification  by  Output. — It  is  not  possible  to  make 
a  single  classification  of  manufacturing  industries  from 
which  one  may  learn  all  that  should  be  known  respecting 
this  important  branch  of  production.    The  classification 


26  DESCRIPTION  OF  INDUSTRY 

usually  made  divides  manufacturing  industries  according 
to  the  kind_QJLciilQSaodities^  produced.  This  is  a  good 
classification  if  its  purpose  is  to  show  the  wide  range  of 
work  covered  by  this  group  of  industries.  It  is  the  classi- 
fication adopted  by  Congress  in  framing  tariff^  legislation. 
The  following  is  a  list  of  the  various  kinds  of  industries 
covered  by  that  law: 

Schedule  "A,"  chemicals,  oils  and  paints, 
Schedule  "B,"  earths,  earthenware  and  glassware, 
Schedule  "C,"  metals,  and  manufactures  of, 
Schedule  "D,"  wood,  and  manufactures  of, 
Schedule  "E,"  sugar,  molasses,  and  manufactures  of, 
Schedule  "F,"  tobacco  and  manufactures  of, 
Schedule  "G,"  agricultural  products  and  provisions. 
Schedule  "H,"  spirits,  wines  and  other  beverages. 
Schedule  "I,"  cotton  manufactures. 
Schedule  "J,"  flax,  hemp  and  jute,  and  manufactures  of, 
Schedule  "K,"  wool  and  manufactures  of. 
Schedule  "L,"  silk  and  silk  goods. 
Schedule  "M,"  pulp,  papers  and  books,  and 
Schedule  "N,"  sundries. 

It  will  be  observed  that  some  few  agricultural  and  mining 
products  are  included  in  the  above  list  but,  for  the  most 
part,  they  are  mentioned  because  of  their  connection  with 
manufactures.  It  is  apparent  from  this  Ust  that  the  man- 
ufacturing industry  occupies  a  large  field  in  the  world  of 
business.  It  offers  an  almost  unlimited  opportunity  fo? 
investments  and  for  choice  of  occupation  on  the  part  of 
the  worker.  From  it  one  may  gain  a  clear  idea  of  what  Is 
meant  by  specialization  in  industry.  The  scope  of  the 
manufacturing  industry  as  shown  by  the  variety  of  goods 
made,  as  also  the  degree  of  excellence  attained  in  the  man- 
agement  of  factories,  is  commonly  accepted  as  the  best  test 


CLASSIFICATION  OF  INDUSTRIES  27 

of  the  stage  of  industrial  development  at  which  a  country- 
has  arrived.  The  history  of  the  growth  of  industry,  espe- 
cially in  the  nineteenth  century  and  at  the  present  time, 
is  largely  concerned  with  the  history  of  manufactures. 

(b)  Classification  by  Material  used. — Every  manufacturer 
buys  what  he  calls  his  raw  material  and  sells  what  he  calls 
his  finished  product.  In  many  cases,  the  finished  product 
of  one  factory  will  be  the  raw  material  for  another.  Thus, 
wheat  is  a  raw  material  for  the  miller  who  manufactures 
flour;  flour  is  the  raw  material  for  a  baker.  In  a  country 
of  highly  specialized  industries,  there  may  be  as  many 
independent  factories  as  there  are  steps  or  processes  in 
the  making  of  the  finished  products,  in  which  case  there 
will  be  as  many  different  sorts  of  raw  material  as  there 
are  kinds  of  factories. 

It  is  because  the  process  of  manufacture  is  organized  in 
this  way  that  manufacturing  industries  are  sometimes 
classified  as: 

Those  that  use  crude  raw  materials, 

Those  that  are  one  step  removed  from  crude  raw  mate- 
rials, 

Those  that  are  two  steps  removed  from  crude  raw  mate- 
rials, and  so  on,  down  to  the  finished  product.  This  inter- 
dependence of  factories  is  a  phase  of  modem  business 
organization.  It  is  largely  responsible  for  the  efficiency 
of  the  modem  productive  process.  From  the  classification 
of  industries  on  the  basis  of  the  kind  of  material  which 
each  factory  uses,  one  gains  a  yet  clearer  impression  of 
what  is  meant  by  industrial  organization  under  the  in- 
fluence of  the  principle  of  division  of  labor.  Each  step  in 
the  progress  from  raw  material  to  the  finished  product  is 
an  illustration  of  that  principle. 


i8  DESCRIPTION  OF  INDUSTRY 

(c)  Classification  by  Elements  of  Cost. — A  third  possible 
classification  of  manufacturing  industries  rests  on  what 
is  known  as  the  elements  of  cost  that  enter  into  every 
manufactured  product.  These  elements  are  various,  but 
the  illustration  here  submitted  is  confined  to  what  is 
called  the  labor  cost  and  the  cost  that  covers  the  use  of 
machinery.  A  factory  that  produces  a  product  worth 
$500,  of  which  $450  is  the  amount  paid  to  workers  as 
wages,  is  a  very  different  thing  from  a  factory  that  pays 
but  $200  in  wages  in  order  to  make  a  product  worth  $500. 
Some  of  the  big  questions  of  factory  management  turn 
on  this  difference.  For  example,  the  invention  of  a  new 
machine  to  be  used  as  a  substitute  for  labor  would  be  of 
relatively  greater  importance  in  the  first  than  in  the  second 
of  the  assumed  cases.  The  effect  of  a  labor-saving  device 
on  prices,  or  of  improved  organization,  also,  is  greater. 
This  is  no  place  for  the  discussion  of  the  technique  of 
business  management,  but  it  is  worth  while  to  know  the 
practical  bearing  of  a  classification  of  industries  on  the 
basis  of  an  analysis  of  costs. 

§  8.  The  Carrying  Industries.— (:The  service  of  the  in- 
dustries here  called  the  carrying  industries  is  to  bring 
goods  to  those  who  want  them  at  the  time  when  they  are 
needed.)  A  loaf  of  bread  is  of  no  value  to  a  hungry  man 
unless  he  can  get  it  in  his  possession.  Coal  at  the  mine  has 
no  value  for  the  consumer  unless  he  is  assured  that  it  will 
be  put  in  his  coal  bin  where  he  can  get  at  it.  A  book 
printed  in  London  has  no  value  unless  it  can  be  delivered 
to  him  by  a  book  dealer  or  the  postman.  From  these 
illustrations,  it  is  evident  that  any  satisfactory  arrange- 
ment of  industry  must  make  provision  for  the  transporta- 
tion and  distribution  of  goods,  and  that  those  workers  who 


CLASSIFICATION  OF  INDUSTRIES  29 

render  this  service  are  as  necessary  to  a  well-organized 
industrial  society  as  those  who  are  engaged  in  agricultural 
or  manufacturing  pursuits.  Their  labor  is  productive 
labor.  This  point  will  be  explained  in  the  chapter  upon 
the  Market.  It  is  referred  to  here  in  order  to  avoid  an 
erroneous  conclusion  with  respect  to  the  conditions  under 
which  value  exists. 

The  carrying  industries  may  be  grouped  under  three 
general  heads  according  to  the  character  of  the  service 
rendered.    These  are: 

The  service  rendered  by  merchants, 

The  service  rendered  by  transportation  agencies,  and 

The  service  rendered  by  bankers  and  other  business  men 
who  have  to  do  with  what  is  called  credit. 

(a)  The  Service  of  Merchants. — It  is  the  peculiar  service 
of  the  merchant  that  he  discovers  the  wants  or  needs  of 
consumers  and  devotes  his  time  and  money  to  the  satis- 
faction of  those  wants.  He  buys  the  goods  from  the  pro- 
ducer or  the  manufacturer  in  order  to  sell  them  again 
to  the  consumer  at  the  time  and  the  place  where  they  can 
be  of  the  greatest  use.  He  makes  the  oranges  of  Florida, 
the  cotton  goods  manufactured  in  Massachusetts,  the 
wheat  grown  in  the  Dakotas,  available  for  consumption  by 
every  man,  woman,  and  child  throughout  the  length  and 
breadth  of  the  land.  It  is  he  who  assumes  the  risk  of 
buying  in  large  quantities  in  order  to  supply  consumers 
with  the  small  amounts  which  they  may  need.  His  pay 
for  this  service  is  what  is  known  as  the  merchant's  profit; 
it  is  the  difference  between  the  price  which  he  pays  and 
the  price  at  which  he  sells,  less  the  amount  required  for 
current  expenses.  The  merchants  have  always  played  an 
important  role  in  industrial  society. 


30  DESCRIPTION  OF  INDUSTRY 

(b)  The  Transportation  Service. — Under  the  head  of  the 
transportation  service  are  included  those  who  own  the  ma- 
chinery for,  and  do  the  work  of,  carrying  goods.  They  do 
not  own  the  goods  transported.  They  are  not  responsible 
for  selecting  the  kind  of  goods  to  be  carried.  It  is  their 
task  to  receive  the  goods  that  are  delivered  to  them  for 
shipment  and  to  deliver  them  to  those  to  whom  they  are 
consigned.  The  service  which  they  perform  is  ordered 
before  it  is  rendered,  and,  for  the  most  part,  it  is  prepaid. 
Railways  do  not  assume  commercial  risks  such  as  are 
assumed  by  the  merchant.  They  render  a  definite  service, 
and  for  this  service  make  a  definite  charge. 

A  list  of  the  transportation  agencies  which  make  up  the 
transportation  service  as  it  appears  in  the  United  States 
may  assist  us  to  comprehend  the  significance  of  transporta- 
tion to  the  modem  business  world.  In  addition  to  roads 
and  highways,  riversjjidjakes,  and  waterjronts  for  har- 
bors and  docks,  the  modern  system  of  transportation 
covers  quite  a  number  of  more  or  less  separate  industries. 
The  following  is  a  list  of  such  industries:  Railways,  ex- 
press companies,  pipe  lines,  post-office,  sleeping  car  com- 
panies, telegraph  companies,  and  telephone  companies. 
From  this  list,  one  may  readily  see  that  the  business  of 
transportation  holds  a  very  respectable  place  in  the  in- 
dustrial world  as  that  world  is  organized  in  the  United 
States. 

(c)  The  Service  of  Banks. — It  may  seem  a  little  strange 
to  classify  banks  along  with  merchants  and  railways,  but 
such  is  their  proper  place.  The  most  important  function  of 
banks  is  their  exchange  function,  and  the  mechanism  of 
commercial  exchanges  which  the  banks  have  created,  and 
which  they  administer  from  day  to  day,  has  to  do  with 


CLASSIFICATION  OF  INDUSTRIES 


31 


the  carrying  industries  quite  as  much  as  the  buying  and 
selling  of  goods  by  merchants,  or  the  carrying  of  those 
goods  by  the  railways.  It  requires  the  joint  work  of  banks, 
merchants,  and  transportation  agencies  to  carry  goods 
through  the  various  steps  of  their  manufacture  from  the 
producer  to  the  consumer.  A  description  of  credit  ex- 
changes through  banks  will  be  found  in  Chapter  XI. 

In  order  to  bring  together  the  points  covered  by  the 
foregoing  classification  of  industries,  the  following  outline 
is  submitted: 


Outline  of  the  Foregoing  Classification 

Agriculture 


Industrial  Society 


1.  The  Extractive 
Industries 


2.  The  Manufactur- 
ing Industries 


3.  The  Carrying 
Industries 


Aquaculture 

Mining 

Forestration 


Classification    by 

Output 
Classification    by 

Material 
Classification    by 
Elements  of  Cost 


The    Service    of 

Merchants 
The    Service     of 

Transporters 
The    Service    of 

Bankers 


From  the  above  outline,  we  gain  a  general  survey  of  the 
entire  field  of  industry.  It  gives  a  concrete  expression  to 
the  fact  that  all  work  is  co-operative  in  character.   It  makes 


S2  DESCRIPTION  OF  INDUSTRY 

clear  the  essential  unity  of  industrial  society  and  discloses 
to  every  worker  the  place  he  occupies  in  that  society. 

The  outline  renders  also  another  service.  It  prepares 
us  to  recognize  that  each  of  the  three  classes  of  industries 
named  shows  results  pecuUar  to  itself.  Further  study  will 
disclose  the  fact  that  the  natural  business  laws  which  con- 
trol agriculture  do  not  apply  to  manufacture,  and  the 
business  principles  which  control  transportation  are  pe- 
culiar to  this  branch  of  industry.  We  must,  therefore,  be 
prepared  to  approve  different  rules  and  different  policies 
for  the  treatment  of  various  lines  of  business,  according 
as  they  are  grouped  under  the  Extractive,  the  Manu- 
facturing, or  the  Carrying  Industries. 

§  9.  The  Business  of  Buying  and  Selling. — In  one  re- 
spect the  foregoing  outline  leaves  a  wrong  impression. 
The  service  of  the  merchant  is  grouped  under  the  Carry- 
ing Industries.  So  far  as  the  nature  of  the  service  is  con- 
cerned, this  is  correct.  The  work  of  the  merchant  does 
give  rise  to  a  value  of  place.  Merchants  render  a  useful 
service  in  that  they  bring  things  from  where  they  are  not 
wanted  to  the  place  where  they  can  be  used.  (^  It  would  be 
incorrect,  however,  if  one  should  conclude  that  the  func- 
tion of  buying  and  selling  is  confined  to  the  particular 
class  of  business  men  called  merchants.") 

The  truth  is  that  every  kind  of  industry  of  which  one 
can  imagine,  if  it  is  carried  on  as  a  part  of  industrial 
society,  must  buy  and  sell.  The  farmer  buys  fertilizer 
and  sells  grain;  the  fisherman  buys  bait  and  sells  fish;  the 
manufacturer  buys  raw  material  and  sells  a  finished  prod- 
uct; the  management  of  a  railway  buys  locomotives  and 
cars  and  sells  transportation.  So  evident  a  truth  might 
not  be  worth  the  saying,  were  it  not  for  the  fact  that 


CLASSIFICATION  OF  INDUSTRIES  33 

it  is  frequently  overlooked.  Many  laws  passed  by  Con- 
gress and  Legislatures  fail  to  recognize  that  buying  and 
selling  pertain  alike  to  all  lines  of  production  The  above 
outline  is  correct  only  when  the  service  of  the  merchant 
is  confined  to  those  whose  main  business  is  that  of  buy- 
ing goods  for  the  purpose  of  selling  them  again  at  a  higher 
price. 


CHAPTER  III 
THE   LEGAL   FRAMEWORK   OF   INDUSTRY 

"The  place  of  Law  in  Political  Economy  is  a  subject  which  has 
received  from  English  Economists  no  attention  at  all  commensurate 
with  its  far  reaching  importance." — J.  R.  Commons. 

Sooner  or  later  everyone  must  make  a  place  for  him- 
self in  the  world  of  industry.  He  must  choose  what  he 
will  do  in  order  to  make  a  living.  For  some  this  is  to  find 
a  job;  for  some,  it  is  to  choose  a  trade;  for  some,  it  is  to 
take  up  a  profession,  or  to  enter  upon  some  definite  line  of 
business.  But  whatever  the  grade  or  kind  of  work  chosen, 
everyone,  when  he  begins  to  work,  finds  himself  surrounded 
by  laws  which  he  must  obey,  and  by  established  business 
rules  and  commercial  customs  to  which  he  must  conform. 
He  also  finds  himself  under  the  protection  of  government. 
It  is  these  laws  and  these  rules,  together  with  the  machinery 
of  government  by  which  they  are  enforced,  that  make  up 
what  is  here  termed  the  legal  framework  of  industry, 

§  10.  The  Principle  of  Liberty. — A  study  of  the  legal 
background  of  industry  comes  to  be,  from  one  point  of 
view,  a  study  of  the  manner  in  which  the  principle  of 
liberty  gives  life  and  form  to  industry.  The  bearing  of 
this  statement  will  be  suggested  by  three  remarks  respect- 
ing our  system  of  modern  industrial  law. 

It  must  not  be  supposed  that  laws  and  rules  of  conduct, 
even  though  they  may  be  enforced  by  the  police  and  courts, 
curtail  the  liberty  which  men  so  highly  prize.  On  the  con- 
trary, such  laws  and  rules  are  essentialjorjhe^regiization 
of  what  is  called  industrial  liberty.    The  framework  of  a 


THE  LEGAL  FRAMEWORK  OF  INDUSTRY    35 

house  raises  a  barrier  between  the  householder  and  those 
adverse  elements  that  lie  without.  Its  walls  give  protec- 
tion against  heat,  cold,  and  rain,  and  the  encroachments 
of  evil-minded  men,  but  within  the  dweller  moves  freely 
and  with  safety.  So  it  is  with  industrial  laws  and  business 
rules.  Not  only  do  they  give  character  to  industrial  soci- 
ety, but  they  raise  a  barrier  against  pernicious  interference 
with  the  manner  in  which  one  chooses  to  manage  his  own 
affairs.  They  serve  primarily  as  the  protector  of  each  and 
every  citizen  in  the  exercise  of  his  industrial  rights  and 
business  privileges.  Within  the  protection  of  these  laws 
and  customs,  the  industrial  worker  moves  safely  and  with- 
out restraint.   Therecanbe  no  liberty  without  law. 

Another  result  of  the  fact  that  work  is  carried  on  under 
carefully  devised  legal  conditions  is  that  the  efficiency  of  all 
work  js  thereby  increased.  These  rules  serve  to  direct 
and  to  co-ordinate  all  kinds  of  industrial  effort,  and  thus 
make  effective  the  power  that  lies  in  industrial  freedom. 
This,  also,  may  be  illustrated  by  an  analogy.  The  frame- 
work of  a  locomotive  confines  the  power  generated  by  the 
burning  of  coal,  and  this  it  does  in  order  to  subject  that 
power  to  control,  and  thus  force  it  to  expend  its  energy  in  a 
useful  rather  than  in  a  useless  or  possibly  a  destructive  man- 
ner. In  the  same  way,  the  force  of  self-interest,  the  desire 
for  money,  or  the  ambition  to  control  great  business  enter- 
prises, may  be  destructive  rather  than  productive,  unless 
guided  and  controlled  by  laws  so  framed  as  to  require  men 
to  work  for  a  common  end. 

It  is  a  fundamental  principle  of  mechanics  that  control 
over  poweTL-igjobtained  through_the^straint  of  power. 
This  principle  applies  equally  well  in  the  world  of  business. 
The  legal  framework  of  industry  is  that  which  guides  and 


36  DESCRIPTION  OF  INDUSTRY 

controls  men  in  the  exercise  of  their  industrial  freedom. 
The  laws  and  political  institutions  that  stand  back  of  all 
organized  industry  are  essential  for  industrial  success. 

A  third  fact  may  be  noted  which  throws  further  light 
on  the  character  Qlindustrial  laws  and  business  customs. 
The  apparent  purpose  of  all  such  laws  aMregnlationsls 
to  encourage  work  by  stimulating  the  self-interest  of 
workers.  It  is  recognized  that  industrial  liberty  is  neces- 
sary for  a  high  degree  of  industrial  efficiency.  There  is, 
however,  another  purpose  equally  important  and  perhaps 
more  fundamental,  if  one  may  judge  by  the  history  of  the 
English  speaking  people.  This  purpose  is  so  to  organize 
co-operative  work  that  the  force  which  lies  in  organiza- 
tion will  contribute  to  the  wetfgje^ofJJie^cominiinity  as 
well  as  to  the  advantage  of  the  individual.  This  explains 
why  so  many  of  the  laws  that  touch  industry  are  prohibi- 
tive laws.  For  example,  the  traffic  manager  of  a  railway 
is  not  permitted  to  favor  one  shipper  as  against  another. 
This  would  be  "discrimination,"  and  "railway  discrirnina- 
tion"  is  prohibited  by  Congressional  act.  Another  illus- 
tration is  found  in  the  fact  that  no  man  is  permitted  to 
carry  on  a  business  that  is  a  public  nuisance_or  that  dis- 
regards ^gubficinteregt^  The  end  held  in  view  by  our 
system  of  industrial  law  is  that  the  enduring  welfare  of 
society  should  be  established  and  maintained. 

From  the  foregoing,  one  may  learn  a  significant  lesson. 
The  principle  of  liberty  which  for  six  centuries  has  been 
guiding  the  history  of  the  English  speaking  people,  finds 
its  industrial  expression  in  the  system  of  law  which  that 
history  has  evolved. 

§  11.  Classification  of  Legal  Adjustments. — Industrial 
laws  and  customs  are  of  two  general  sorts  according  to 


THE  LEGAL  FRAMEWORK  OF  INDUSTRY    37 


the  authority  upon  which  they  rest.  They  are  either  facts 
of  history,  like  the  absence  of  slavery  or  the  institution  of 
private  property,  or  they  are  laws  passed  by  some  legis- 
lative  body  which  prescribe  the  conditions  under  which 
men  may  work.  Laws  which  prohibit  child  labor  or 
which  lay  down  rules  for  working  in  mines  are  illustrations 
of  such  enactments.  The  interpretation  of  laws  given  by 
courts  or  administrative  officers  falls  under  the  same 
heading.  Such  interpretations  define  the  conditions 
under  which  men  must  work.  If  to  such  legal  adjust- 
ments are  added  the  protective  functioiis  of  Government, 
provision  will  have  been  made  for  a  complete  survey  of 
the  legal  framework  of  industry.  An  outline  of  such  a 
survey  is  found  in  the  following  classification  of  those 
laws  and  rules  of  conduct  which  make  up  the  background 
of  our  industrial  society. 

Analysis  of  the  Legal  Framework  of  Industry 

a.  Property  in  Land 

b.  Property  in  Capital 
1.  Law  of  Property  J  c.  Property  in  Organiza- 
tion 

d.  Property   in   consum- 
able Goods 


Legal  frame- 
work of 
Industry 


Primary 
rights 
that  rest 
on  history 


n.  Secondary 
rights  that 
rest  on  Acts 
of  govern- 
ment 


2.  Law  of  Person 


Rules  imposing 
Conditions 
of  work 


2.  Government  as 
Protector 


a.  Industrial  freedom 

b.  Equality     of    opf>or- 

tunity 

c.  Number    and    move- 

ment 

d.  Voluntary  association 


a.  Laws  which  prescribe 

condition 

b.  Laws    which    provide 

for  supervisory  con- 
trol 

c.  Laws    which    provide 

for     administrative 
control 


a.  Protection  against  ag- 

gression from  with- 
out 

b.  Protection   from   vio- 

lence within 
o.  Enforcement   of   legal 
contracts 


S8  DESCRIPTION  OF  INDUSTRY 

To  understand  the  above  outline  in  all  its  bearings  calls 
for  a  knowledge  of  industrial  history  greater  than  those 
for  whom  this  book  is  written  are  likely  to  possess.  For 
that  reason,  we  shall  pass  without  comment  the  philosophy 
which  underlies  our  industrial  history  and  come  at  once 
to  the  consideration  of  some  of  the  practical  results  that 
flow  from  the  system  of  rights  and  duties  recognized  by 
the  modem  business  world.  This  will  be  done  under 
the  four  headings  named  in  the  outline,  that  is  to  say: 

The  Law  of  Property, 

The  Law  of  Persons, 

Laws  imposing  Conditions,  and 

Government  as  a  Protector. 
§  12.  The  Law  of  Property.  —  The  necessity  of  a  law 
of  property  of  some  sort  is  an  eternal  necessity.  No  so- 
ciety, at  least  no  industrial  society  that  puts  into  practice 
the  principle  of  division  of  labor,  can  exist  without  a  law 
of  property.  The  important  fact  about  property  is  that 
it  ^ves_control_over  the  thing  owned.  It  gives  some  one 
the  right  to  say  where  and  how  a  thing  is  to  be  used. 
Under  no  other  conditions  will  free  men  consent  to  work. 
Nature  is  quite  as  willing  to  produce  a  crop  of  weeds  as 
to  raise  a  crop  of  corn.  She  must  be  guided,  controlled, 
coerced  by  men  so  to  use  her  energies  as  to  bring  forth 
from  the  soil  things  useful  to  mankind.  But  no  man 
will  trouble  himself  to  coerce  Nature,  that  is  to  say,  no 
man  would  undertake  to  cultivate  the  soil  as  a  responsible 
worker,  without  some  assurance  that  the  crop,  when 
grown,  will  belong  to  him. 

What  is  true  of  the  work  of  the  cultivator  of  the  soil, 
is  equally  true  of  every  other  kind  of  work.  No  one, 
except  he  be  a  slave,  will  work  as  a  responsible  producer 


THE  LEGAL  FRAMEWORK  OF  INDUSTRY    89 

unless  he  has  some  interest  in  theresult  of  bis  work^  The 
sense^f  possession  is  a  necessary  condition  to  production. 
Modern  peoples,  let  us  say  the  Christian  nations  since 
the  16th  century  and  especially  the  English  speaking 
peoples,  have  sought  to  give  this  security  to  industrial 
workers  by  creating  for  men  a  property  right  in  the  in- 
struments of  production.  (This,  and  all  that  it  implies, 
is  what  is  known  to  our  law  as  the  institution  of  private 
property,!  According  to  this  system  of  law,  men  may 
become  proprietors  of  the  instruments  of  production  and 
are  acknowledged  owners  of  the  products  that  result  from 
the  use  of  these  instruments.  They  may  buy  and  sell  as 
they  see  fit  those  things  which  they  own,  and  in  every 
way  control  their  use  except  it  be  that  in  their  use  they 
do  something  contrary  to  the  interest  of  the  public  as  a 
whole.  From  this  it  is  evident  that  the  institution  of 
private  property  has  given  to  men  that  liberty  of  action 
and  control  over  work  to  which  history  gives  the  name 
of  industrial  freedom. 

Further  light  will  be  thrown  on  modem  industry  by 
observing  the  kinds  of  things  which  the  law  gives  workers 
the  right  to  own.    The  present  law  recognizes 

property  in  land, 

property  in  capital, 

property  in  organization,  and 

property  in  consumable  goods, 
(a)  Property  in  Land.  In  the  foregoing  chapter,  it  was 
suggested  that  agriculture  is  the  primitive  industry,  from 
which  it  follows  that  property  in  land  is  of  very  early 
date.  Speaking  generally,  however,  ownership  of  land 
used  for  cultivation  was  ori^nally  a^onamon  o^sraership. 
It  was  not  until  the  16th  century  that  the  right  of  in- 


40  DESCRIPTION  OF  INDUSTRY 

dividuals  to  exclusive  ownership  of  land  for  industrial 
purposes  was  recognized  by  the  English  speaking  people. 
At  present,  this  idea  of  land  has  been  extended  to  include 
all  natural  agencies  of_production  which  for  any  reason 
men  may  desire  to  own  as  private  property.  The  income 
which  the  owner  receives  because  of  the  fact  of  ownership 
is  called  rent.  How  rent  arises,  and  how  it  is  measured, 
will  be  considered  in  another  place;  for  the  present,  it  is 
sufficient  to  know  that  property  which  bears  a  rent  is  a 
class  by  itself;  that  the  interest  of  the  owners  of  such 
property  is  what  is  termed  the  landlord's  interest;  and 
that  landlords  will  continue  to  be  a  permanent  class  in 
our  industrial  organization  as  long  as  private  property 
in  land  continues  to  exist.  (Land  includes  all  instruments 
used  in  industry  which  Nature  gratuitously  provides.J 
(b)  Property  in  Capital. — ^A  second  class  of  industrial 
instruments  are  those  which  men  have  made  by  work. 
These  instruments  are  covered  by  the  comprehensive 
word  "Capital."  f  Capital,  then,  may  be  defined  as  a  prod- 
uct of  past  work  used  by  workers  in  current  production.  J 
In  this  sense,  a  machine  is  capital.  ImraQyementsjnade 
on  land  are  capital,  and  the  food^^which  workers  use  for 
present  existence  while  working  on  goods  that  will  not  be 
completed  for  some  considerable  time,  is  capital.  Our  law 
recognizes  these  instruments  of  production  as  objects  of 
private  ownership.  This  fact  gives  rise  to  an  industrial 
class  known  as  capitalists  and  to  the  form  of  income  known 
as  interest.  How  capital  assists  production,  what  deter- 
mines the  interest  paid  for  the  use  of  capital  and  other 
similar  questions  will  not  be  here  considered.  Our  present 
purpose  is  satisfied  when  we  recognize  that  those  things 
which  men  fashion,  or  those  goods  which  they  accumulate 


THE  LEGAL  FRAMEWORK  OF  INDUSTRY    41 

in  order  to  assist  present  and  future  production,  may  be 
privately  owned,  and  that  this  ownership  gives  rise  to  a  cap- 
itaUst  class  which  receives  an  income  in  the  form  of  interest. 

(c)  Property  in  Organization. — Our  present  law  also 
recognizes  property  in  organization.  Work,  we  have 
learned,  is  co-operative,  from  which  it  follows  that  some 
form  of  organization  must  be  created  in  which  each  worker 
finds  a  place  and  under  which  workers  or  groups  of  workers 
are  directed  and  controlled  for  efficient  production.  The 
building  of  a  business  is  quite  the  same  as  the  making  of 
instruments  of  production  which  we  have  called  capital. 
It  is  not  strange,  therefore,  that  our  law  should  recognize 
organization  as  an  object  of  private  ownership.  (The 
revenue  which  comes  to  those  who  own  industrial  organiza- 
tions is  profit^  and  owners  of  this  class  of  property  are 
spoken  of  throughout  this  book  as  indygtrialjnanagers. 
They  are  responsible  for  combining  land,  capital  and  work 
in  specific  industries.  They  pay  rent  for  the  land  occupied, 
interest  for  the  capital  used,  wages  for  the  workmen  em- 
ployed, and  receive  as  their  pay  the  difference  between  the 
cost  of  making  a  product  and  the  proceeds  arising  from 
its  sale. 

(d)  Property  in  Consumable  Goods. — ^The  end  of  all  pro- 
duction is  consumption.  Things  produced  are  said  to  be 
consumed  when  they  are  used  up  in  the  satisfaction  of  the 
wants  for  which  they  are  designed.  This,  at  least,  is  normal 
consumption.  The  eating  of  bread  by  a  hungry  man  is 
consmnption.  To  wear  out  a  suit  of  clothes  is  consumption 
of  the  clothes.  To  wear  a  clean  shirt  until  it  is  soiled  and 
ready  for  the  laundry  is  to  consume  the  cleanness  of  the 
shirt.  To  be  warmed  by  the  coal  burnt  in  a  furnace  is  to 
consume  the  coal.   To  live  in  a  house  while  the  paint  grow? 


42  DESCRIPTION  OF  INDUSTRY 

old  and  dingy  is  to  consume  the  paint.  For  thousands  of 
men  to  ride  millions  of  miles  behind  a  locomotive  until 
finally  the  locomotive  is  passed  to  the  scrap  heap,  is  to  con- 
sume the  locomotive.  Thus  consumption,  or  rather  the 
satisfaction  of  human  desires  through  consumption,  is  the 
end_of  all  production. 

Speaking  generally,  the  law  of  private  property  applies 
to  all  kinds  of  consumable  goods.  There  are  very  few 
things  over  which  the  state  assumes  the  right  of  exclusive 
purchase.  And  when  an  individual  in  the  exercise  of  his 
right  buys  a  commodity,  he  can  do  with  it  as  he  sees  fit. 
Without  going  into  details,  it  is  evident  that  the  legal 
system  under  which  we  live  aims  to  give  the  same  Uberty 
of  choice  in  the  realm  of  consumption  as  in  that  of  produc- 
tion. Freedom  of  individual  action  in  the  latter  realm  is 
attained  through  the  law  of  property  in  land  and  capital; 
freedom  in  the  former  is  attained  through  the  law  of 
property  in  consumable  goods.  In  both  cases,  the  pur- 
pose of  the  law  of  property  is  to  place  full  and  complete 
responsibiUty  on  individuals  for  their  industrial  conduct 
and  their  personal  happiness. 

§  13.  The  Law  of  Personal  Liberty. — ^The  social  aim 
of  the  English  sneaking  people,  as  disclosed  by  their  his- 
tory, is_the  realizaXion_of^gersonalHberty. 

The  rights  conferred  and  the  duties  imposed  by  what 
is  sometimes  called  the  Law  of  Persons,  so  far  as  they  per- 
tain to  industrial  affairs,  may  be  grouped  under  the  follow- 
ing heads: 

Individual  Freedom, 

Equality  of  Opportunity, 

Number  and  Movement,  and 

Voluntary  Association. 


THE  LEGAL  FRAMEWORK  OF  INDUSTRY    43 

(a)  l7i^jj]i^!jnl_Fre^mn^ — ^A  study  of  the  growth  of  in- 
dustry shows  three  conditions  under  which  the  great  body 
of  workers  have  been  obliged  to  work: — first,  that  of 
slavery;  second,  that  of  serfdom;  and  third,  that  of  free- 
men working  for  wages.  The  class  of  workers  to  whom 
this  generalization  applies  are  commonly  called  laborers, 
and  that  word  will  be  used  in  what  follows. 

Under  slavery,  the  laborer  is  the  property  ^f  his  patron 
or  his  master.  The  various  ways  by  which  men  came  under 
the  yoke  of  slavery,  while  an  interesting  story,  pertains  to 
another  study  than  the  one  which  now  claims  our  atten- 
tion. It  is  sufficient  to  recognize  that  under  this  form  of 
industrial  organization,  the  slave  has  no  rights.  He 
assumes  no  duties.  In  short,  he  has  no_standing  whatever 
before  the  law.  Great  civilizations,  as  for  example  the 
Roman  civilization  in  one  period  of  its  history,  have 
rested  on  slave  labor,  but  these  civilizations  were  in  almost 
every  particular  different  from  the  world  with  which  we 
are  familiar. 

In  order  to  understand  the  condition  of  serfdom,  we 
should  know  feudalism.  A  serf  is  a  feudal  laborer.  He  is 
not  property  in  the  sense  that  a  slave  is  property,  nor  is  he 
a  freeman  in  the  sense  that  the  modem  wage  earner  is  a 
freeman.  His  rights  and  his  duties  are  clearly  expressed 
by  the  industrial  customs  of  the  time.  The  point  of  im- 
portance is  that  the  serf  was  rficognized  by  the  law.  That 
tremendous  thing  known  as  Feudalism  was  built  on  serf 
labor.  Its  organization,  its  rules  of  production,  as  also 
its  industrial  results  were  different  from  the  world  with 
which  we  are  familiar. 

By  contrast  with  the  slave  and  the  serf,,  the  laborer  of 
to-day  is  a  workman  who  stands  before  the  law  as  any  other 


44  DESCRIPTION  OF  INDUSTRY 

worker.  If  one  must  speak  of  laborers  in  the  language  of 
property,  the  modern  laborer  owns  himself  and  the  law 
does  not  permit  him  to  part  with  that  ownership.  So  far 
as  the  law  is  concerned,  there  is  no  labor  class.  All  men 
are  equal  before  the  law.  NQjnaais  conipelled  by  law  to 
be,a  laborer.    This  is  our  first  important  lesson. 

When,  however,  one  observes  the  situation  as  it  is  in  the 
modern  business  world,  he  is  obliged  to  recognize  ajabor 
c^ass,  and  to  acknowledge  that  this  fact  gives  character 
to  modern  industry.  The  labor  class  of  to-day  is  composed 
of  freemen  who  work  for  wages.  It  is  a  wage  earning  class, 
and  the  peculiar  fact  respecting  it  is  that  laborers  have  no 
propertyin.  thejnsteum£jitai)f4inad  The  ownership 

of  land  gives  rise  to  the  landlord  class;  the  ownership  of 
capital  gives  rise  to  the  capitalist  class;  the  ownership  of 
organizations  gives  rise  to  the  class  of  responsible  man- 
agers; but  the  wage  earner  is,  from  the  point  of  view  of 
industry,  a  propertyless  man.  His  income  is  the  wages 
he  earns. 

The  recognition  of  these  four  industrial  classes,  and  of 
the  kind  of  income  which  each  receives  out  of  the  conamon 
output  of  co-operative  work,  is  important  for  the  student 
of  industry.  It  shows  the  industrial  result  of  the  laws  of 
private  property  and  personal  freedom,  as  they  have 
worked  up  to  the  present  time. 

This  study  of  the  legal  background  of  industry  enables 
one  to  understand,  also,  what  is  meant  by  the  phrase, 
that  the  modern,  business  wimld  isjjuilt  on  the  wages 
system.  Every  decision  of  industrial  management,  every 
contract  between  employers  and  employees,  every  in- 
dustrial law  contemplated  by  our  legislators,  is  adjusted 
to  the  fact  that  the  great  body  of  workers  are  freemen 


THE  LEGAL  FRAMEWORK  OF  INDUSTRY    45 

who  sell  their  strength,  their  skill,  and  their  time  for  so 
much  a  day.  As  the  Roman  civilization  was  based  on 
slave  labor,  as  feudalism  was  made  to  rest  on  serf  labor, 
so  our  modem  civilizatioiL-xesta-OiLwhat  is  known  as  the 
w^es^^m.  ~This  second  lesson  is  well  worth  remember- 
ing. ^' 

(b)  EquaUty  of  Opportunity. — It  lies  in  the  theory  of 
industrial  law  thatlilTmen  shall  be  granted  the  same  op- 
portunity of  industrial  success.  This  is  attained  by  the 
abolition  of  classes,  so  far  as  classes  are  recognized  by  law. 
In  the  modern  world,  noJegaLprivilege  is  conferred  byjthe 
accident  of  births.  There  are  no  industrial  rules  which 
limit  men  in  their  choice  of  a  place  in  industry.  Every 
profession,  trade,  or  line  of  business,  opens  its  doors  to  the 
choice  of  industrial  freemen.  A  son  is  no  longer  limited 
to  the  industrial  station  which  his  father  occupied.  On 
the  contrary,  it  is  assumed  by  the  legal  system  under 
which  we  live  that  every  avenue  of  work  is  open  to  every 
man,  and  that  he  has  the  choice  to  make  good  or  to  fail  in 
any  profession,  trade,  or  line  of  business  that  he  chooses. 

The  industrialJiheQry  which  springs  out  of  this  fact  of 
law  is  that,  through  freedom  of  opportunity,  society  as  well 
as  individual  workers  will  reap  the  highest  possible  bene- 
fits^ It  assumes  that,  under  equal  opportunity,  every 
worker  will  do  the  best  possible  for  himself,  and  that  in  so 
doing  he  will  contribute  in  the  highest  degree  possible 
to  the  well-being  of  all  workers.  The  legal  framework 
of  modem  industry  places  no  barrier  to  the  highest  suc- 
cess which  it  is  possible  for  any  citizen  of  the  business 
world  to  attain. 

(c)  N  umber s^omdMjqvement. — Among  the  technical  rights 
conferred  by  the  modem  system  of  law,  are  the  right  of 


46  DESCRIPTION  OF  INDUSTRY 

mgrrigige^nd^the  right  of  migratioQ>  The  bearing  of  these 
rights  on  industry  comes  through  their  influence  upon  the 
growth  and  territorial  distribution  of  population.  Workers 
are  merely  people  working,  and  the  number  of  people 
who  must  be  sustained  by  the  working  organization  is  at 
any  time  an  important  fact.  The  increase  or  decrease  in 
numbers  depends  upon  the  relation  of  the  birth  rate  to 
the  death  rate,  from  which  it  follows  that  a  system  of 
law  which  names  the  right  to  establish  a  family  among 
the  personal  rights  of  individuals,  refrains  from  exercising 
any  direct  control  over  the  increase  or  decrease  in  popula- 
tion. The  question  of  population  is  a  diflScult  one  from 
whatever  angle  it  may  be  regarded.  The  point  here  to  be 
noted  is  that,On  so  far  as  numbers  influence  in  any  way 
the  character  of  industrial  society,  the  law  refrains  from 
exercising  any  control.) 

The  number  of  workers  for  any  particular  nation  is  also 
affected  by  what  is  termed  the  rightofmi^^iioB-  Speak- 
ing generally,  the  situation  is  as  follows.  Birth  gives  to 
every  man  a  recognized  place  in  a  particular  society.  This 
birthright  he  is  at  liberty  to  abandon,  but  he  has  no  right 
to  demand  a  place  in  the  society  of  another  nation.  Im- 
migration is  a  privilege  conferred  and  not>  right  of  f unda- 
mentalJaKi.  For  the  most  part,  however,  those  nations 
which  have  large  industrial  opportunities  always  welcome 
an  influx  of  workers,  provided  they  are  of  the  right  sort. 
The  growth  of  population  in  the  United  States  is  in  part 
due  to  immigration.  It  is  important  for  the  student  of 
industry  to  recognize  these  two  sources  of  increase  in 
population,  and  the  fact  that  while  one  is  the  result  of  a 
fundamental  right  which  rests  on  the  law  of  personal  free- 
dom, the  other  is  under  the  control  of  currentjegislg^n. 


THE  LEGAL  FRAMEWORK  OF  INDUSTRY    47 

(Of  more  importance  is  the  right  of  movement  from 
place  to  place  within  a  country.  )For  the  United  States, 
this  right  of  migration  within  the  jurisdiction  of  the  Fed- 
eral government  is  guaranteed  by  the  Constitution.  Cer- 
tain important  results  flow  from  this  well-established 
fact.  It  gives  what  is  termed  mobility  to^capital  and  to 
la^or.  The  distribution  of  industry  throughout  the  coun- 
try is  determined  by  the  choice  of  men  who  control  the 
capital,  and,  consequently,  what  is  termed  the  industrial 
development  of  the  nation,  so  far  as  the  spread  of  industry 
is  concerned,  is  free  from  the  dictation  of  the  law. 

The  fact  that  laborers  have  the  right  to  migrate  from 
place  to  place  carries  with  it  another  significant  result. 
If  wages  are  high  in  one  locality  and  low  in  another,  the 
tendency  will  be  for  laborers  to  migrate  from  the  place 
where  wages  are  low  to  the  place  where  wages  are  high. 
This  means  that  the  labor  market  is  nation  wide.  Not 
only  does  it  tend  to  equalize  wages  between  different  parts 
of  the  country,  but  it  makes  it  possible  Ifor  industries  to 
plant  themselves  where  the  natural  conditions  are  the  most 
inviting. )  For  a  variety  of  reasons,  laborers  do  not  readily 
move  from  place  to  place,  but,  so  far  as  the  law  is  con- 
cerned, the  right  of  such  movement  is  fully  guaranteed. 
This,  also,  is  a  fact  of  immense  importance  to  the  student 
who  desires  to  understand  modern  industrial  society. 

(d)  Voluntary  Association. — An  important  corollary  of 
industrial  freedom  is  the  right  of  contract.  Workers  of 
all  classes  are  at  liberty  to  enter  into  any  industrial  ar- 
rangement they  may  agree  upon,  provided  such  agree- 
ment is  not  contrary  to  the  public  interest.  An  important 
industrial  fact  is  that  the  co-operation  of  workers,  to  which 
reference  was  made  in  the  first  chapter,  is  realized  through 


48  DESCRIPTION  OF  INDUSTRY 

the  exercise  of  the  right  of  contract.  The  right  of  con- 
tract is  an  expedient  provided  by  the  law  in  order  that 
men  may  choose  freely  what  they  will  do  and  how  they 
will  do  it.  All  arrangements  for  co-operative  work,  what- 
ever they  may  be,  stand  before  the  law  as  voluntary  asso- 
ciations. They  are  associations  entered  into  voluntarily 
by  men  who  are  free  to  make  contracts. 

There  are  two  phases  of  voluntary  association  of  suf- 
ficient importance  to  warrant  mention.  The  first  of  these 
is  what  is  known  as  corporations.  This  is  the  age  of  big 
industries.  Individuals  are  not  able  to  maintain  them- 
selves in  the  business  world  with  the  amount  of  capital 
that  they,  as  individuals,  are  able  to  command.  For  this 
reason,  many  men,  each  of  whom  has  a  little  capital, 
come  together  and  organize  a  corporation.  This  corpora- 
tion is  a  big  capitalist.  It  stands  for  the  little  capitalists 
who  have  entrusted  their  funds  to  it  for  the  purpose  of 
business  management.  (^The  corporation  is  a  voluntary 
association jand  is  at  liberty  to  act  in  the  business  world 
very  much  as  an  individual  might  act.  The  place  which 
corporations  occupy  in  the  modern  business  world,  and 
the  influence  which  they  exert  by  virtue  of  the  fund  of 
capital  which  they  control,  are  problems  which  the  stu- 
dent of  industry  cannot  avoid. 

A  second  illustration  of  voluntary  association  is  found 
in  the  organization  of  the  labor  interest;  that  is  to  say, 
in  the  trade  unions.  These,  like  corporations,  are  volun- 
tary associations.  Their  influence  upon  the  world  of 
industry  is  unquestioned.  Nobody  quite  knows  what 
their  exact  position  is  in  the  eye  of  the  law.  Their  exist- 
ence, like  that  of  corporations,  presents  many  perplexing 
problems  to  the  student  of  industry.    Our  present  lesson, 


THE  LEGAL  FRAMEWORK  OF  INDUSTRY    49 

however,  is  learned  when  we  recognize  not  only  that  trade 
unions  exist,  but  that  they  have  come  into  existence  as  a 
result  of  the  exercise  by  laborers  of  those  personal  and 
industrial  rights  which  our  law  confers. 

§  14.  Statutes  Imposing  Conditions  of  Work.  —  In 
the  foregoing  discussion,  attention  was  called  to  the  fact 
that  the  results  of  industrial  freedom  as  we  see  them 
to-day,  do  not  in  all  respects  harmonize  with  the  idea  that 
lies  back  of  the  legal  system  by  which  that  freedom  is 
conferred.  This  should  not  be  the  occasion  of  surprise. 
A  system  of  law  which  confers  equal  opportunities  upon 
men  who  are  not  equal  in  strength,  in  skill,  or  in  the 
amount  of  education  they  are  able  to  acquire,  cannot 
produce  equal  results.  Nevertheless,  the  purpose  of  the 
law  is  firmly  held  as  the  purpose  for  which  government 
should  strive,  and  it  is  the  result  of  this  striving  that  one 
reads  in  the  industrial  statutes  of  the  day.  Their  purpose 
is  the  elimination  of  the  evils  which  spring  from  competi- 
tion, and  the  subjection  of  the  exercise  of  freedom  to  such 
restraints  that  equality  of  results,  as  well  as  of  oppor- 
tunity, may  be  realized,  so  far  as  this  can  be  done  without 
impairing  the  eflBciency  of  work. 

Three  kinds  of  laws  or  groups  of  enactments  may  be 
named  which  hold  this  end  in  view.    These  are: 

Laws  which  prescribe  conditions, 

Laws  which  provide  for  supervisory  control,  and 

Laws  which  provide  for  administrative  control. 

It  is  not  intended  to  discuss  the  merits  of  these  laws, 
but  rather  to  illustrate  them  in  order  to  make  clear  the 
place  they  occupy  in  the  legal  framework  of  industrial 
society. 

(a)  Tjn/wR_wh^ir}i.  Prpjicrihe  CrrndkionR^    One  important 


50  DESCRIPTION  OF  INDUSTRY 

fact,  although  not  a  legal  fact,  must  be  recognized  in 
order  to  understand  those  enactments  which  lay  down 
the  conditions  under  which  men  may  work.  This  fact 
is  that  those  who  manage  business  do  so  because  of  the 
profit  thev  are  able  to  reap  from  the  work  of  manage- 
ment. The  merchant,  for  example,  who  renders  the  im- 
portant service  of  selling  goods  to  the  consumer  where  and 
when  he  wants  them,  makes  his  income  out  of  the  dif- 
ference between  the  price  paid  for  the  goods  and  the  price 
at  which  he  sells  them  to  the  consumer.  If  there  were  no 
margin  of  profit,  he  would  not  continue  this  work.  The 
manufacturer,  also,  works  for  profit.  He  invests  in  a 
building  and  in  machinery;  he  buys  the  material  out  of 
which  to  make  a  product;  he  pays  wages  to  those  who 
work  upon  his  material  with  his  machines;  and  he  sells 
the  product  on  the  open  market.  His  profit  is  the  differ- 
ence between  the  proceeds  of  sale  and  the  costs  of  produc- 
tion. Unless  the  proceeds  of  such  sale  exceed  the  cost  of 
production,  he  will  not  continue  to  work  as  a  manufac- 
turer. Everywhere  in  industry,  the  desire  to  make  a 
profit  is  the  immediate  object  of  those  who  manage  the 
business. 

Under  such  conditions,  it  is  evident  that  the  merchant 
who  buys  the  cheapest,  or  the  manufacturer  who  pro- 
duces at  the  lowest  cost,  will  make  the  greatest  profit. 
This  leads  to  a  struggle  on  the  part  of  all  producers  to 
reduce  the  cost  of  production,  and  it  is  because  of  the  un- 
fortunate results  of  this  struggle  for  cheapness  that  many 
of  those  laws  which  aim  to  control  the  conditions  under 
which  work  is  done,  have  arisen.  Laws  which  regulate 
the  emplovmept  of  p.hjldrftn  in  factories  are  a  simple 
illustration  of  this  class  of  enactments. 


THE  LEGAL  FRAMEWORK  OF  INDUSTRY    51 

(b)  Laws  which  Provide  for  Supervisory  Control. — There 
are  certain  industries  which,  for  one  reason  or  another, 
provide  the  conditions  for  the  success  or  the  failure  of 
men  engaged  in  other  industries.  The  railway  industry- 
is  such  an  industry.  Those  who  live  along  the  line  of  a 
railway  are  dependent  for  industrial  success  upon  the 
cheap  and  certain  transportation  of  their  products.  An 
illustration  will  make  this  clear. 

Suppose  three  men  are  producing  soap  for  sale  upon 
the  open  market.  Their  product  is  of  the  same  grade 
and  their  process  of  manufacture  equally  efficient.  Under 
such  conditions,  the  purpose  of  the  law  in  providing  in- 
dustrial freedom  would  be  realized,  both  for  the  producer 
and  the  consumer.  The  profit  to  each  soap  maker  would 
be  a  fair  profit,  and  the  price  to  the  consumer  a  fair  price. 
Suppose,  however,  that  the  railway  carries  the  goods  of 
one  for  less  money  than  it  charges  the  others.  This  would 
give  the  favored  soap  maker  an  advantage  in  the  market, 
and  sooner  or  later  he  will  drive  the  others  out  of  business. 

In  order  to  obviate  this  result  and  to  guarantee  an  equal 
opportunity  for  all  producers,  the  law  prohibits  discrim- 
ination on  the  part  of  railways  and  other  similar  industries. 
It  is,  however,  difficult  to  determine  exactly  where  and 
how  discrimination  occurs.  The  problem  is  not  a  simple 
one.  Its  solution  requires  expert  knowledge  of  the  busi- 
ness of  transportation.  This  being  the  case,  the  law- 
makers provide  for  permanent  commissions  whose  duty  it 
is  to  supervise  the  management  of  the  railway,  in  so  far  as 
this  may  be  necessary,  in  order  to  keep  open  the  door  of 
opportunity  for  all  merchants  and  manufacturers  in  all 
parts  of  the  country.  The  laws  which  created  the  Inter- 
state  Commerce   Commission   and   the   Public   Service 


b2  DESCRIPTION  OF  INDUSTRY 

Commissions  of  the  several  states,  are  illustrations  of  laws 
which  provide  for  supervisory  control. 

(c)  Laws  which  Provide  for  Administrative  Control. — It 
is  possible  for  the  government  to  keep  open  the  door  of 
opportunity,  and  to  protect  society  from  the  evils  that 
follow  unregulated  competition,  by  adopting  another  line 
of  poUcy.  In  the  case  of  railways,  for  example,  instead  of 
creating  a  commission  to  supervise  their  private  manage- 
ment, t^^OYf  rnm<^nt  r^^gbt  undprtaketo  own  and  operate 
the_Eallways.  It  is  a  suggestive  fact  that  everyivhere  in  the 
world,  except  in  those  countries  influenced  by  English  law, 
the  policy  of  government  ownership  of  trunk  line  railways 
is  the  accepted  policy.  Provided  one  sees  that  government 
ownership  and  direct  administration  of  industries  like 
railways  may  be  adopted  as  a  means  to  obviate  discrimuia- 
tion  and  favoritism,  we  have  learned  the  lesson  which  it  is 
here  designed  to  teach.  The  point  is  that  a  system  of 
law  framed  to  realize  industrial  freedom  can  make  room 
for  direct  governmental  administration  over  industries. 

§  15.  Government  as  Protector. — It  is  not  correct  to  say 
I  that  the  government  has  no  part  in  industry.  On  the 
I  contrary,  a  just  and  strong  government  is  the  most  im- 
portant single  fact  for  the  attainment  of  industrial  success. 
History  does  not  provide  a  single  case  of  a  flourishing  in- 
dustry under  a  corrupt  or  weak  government;  but  it  fur- 
nishes many  illustrations  of  fields  unworked,  and  of  in- 
dustries falling  into  decay,  because  workers  were  deprived 
of  the  protection  of  strong  and  just  governments.  Govern- 
ment as  a  protector  is  an  essential  condition  of  an  effective 
and  progressive  business  community.  It  is  in  this  sense 
that  we  include  the  protective  function  of  government  as 
a  part  of  the  legal  framework  of  industry. 


THE  LEGAL  FRAMEWORK  OF  INDUSTRY    53 

The  protective  functions  of  government  of  importance 
to  industry  are: 

Protection  against  aggression  from  without, 
Protection  from  violence  within,  and 
Enforcement  of  contracts. 

(a)    PrntAriirrn^gninRt^A  ggrpnamri^Jrom    Without. — The 

world  is  made  up  of  many  races  and  many  governments, 
and  the  history  of  the  world  is  full  of  aggressive  movements 
by  one  people  on  the  possessions  of  another.  With  the 
necessity  of  such  aggressive  movements  we  have  nothing 
to  say.  Our  point  is  made  when  it  is  seen  that  a  nation 
which  aspires  to  build  up  an  efficient  industry,  or  to  attain 
a  high  standard  of  living,  must  be  a  strong  nation.  It 
must  be  able  to  protect  its  citizens  against  foreign  ag- 
gression of  all  sorts.  Thus  the  government  must  be 
able  to  repel  invasion  should  invasion  be  threatened. 
There  could  be  no  industry,  except  the  industry  of  en- 
forced labor,  in  a  country  under  the  domination  of  a 
foreign  usurper.  The  government  of  a  free  people,  also, 
must  protect  its  citizens  who_£ater  into  foifiifioi.  trade. 
The  home  courts  cannot  give  protection,  and  the  citizen, 
if  his  rights  are  disregarded  when  doing  business  in  a 
foreign  country,  must  be  able  to  appeal  for  protection 
to  the  diplomatic  representatives  of  his  country  residing 
abroad;  that  is  to  say,  the  Ambassador,  the  Minister,  or 
the  Consular  agents. 

Other  illustrations  of  aggression  from  without  might 
be  named.  This  is  a  big  question,  the  discussion  of  which 
belongs  to  political  science.  Our  lesson  has  been  learned 
if  we  see  that  industry  lies  in  the  hand  of  government, 
and  rthat  no  high  industrial  development  is  possible 
excepV  under  the  protection  of  a  government  jthat  is 


54  DESCRIPTION  OF  INDUSTRY 

willing  and  able  to  repel  aggression  of  any  and  every 
sort. 

(b)  Prote<^ion  frmnJViolence  Within. — It  is  not  to  be 
expected  that  all  men  at  all  times  should  feel  that  they 
receive  justice  at  the  hands  of  the  business  world.  Strikes 
on  the  part  of  laborers;  lockouts  on  the  part  of  employers; 
the  outcry  against  high  prices  and  monopolies;  the  charge 
of  tyrannical  use  of  power  on  the  part  of  managers  who 
are  entrusted  with  large  funds  of  capital;  these  and  other 
complaints  that  are  common,  show  the  leaven  of  unrest 
to  be  working  in  our  business  world.  There  is  nothing 
improper  in  this  unrest.  Indeed,  among  free  peoples,  it 
is  the  forerunner  of  those  changes  that  mark  the  path  of 
social  and  industrial  reform.  It  is  essential,  however,  that 
the  peace  of  society  should  not  be  disturbed,  or  the  entire 
industrial  structure  will  tumble;  and  it  is  the  peculiar 
task  of  government  to  protect  the  existing  order  against 
the  violence  that  sometimes  goes  along  with  the  expres- 
sion of  even  just  complaints. 

/-  This  protection  against  violence  from  within  must  be 
/  given  by  government,  without'  rggrarfl  ^.n  f,jip  jnsfipp  or 
v  injustice  jrf^^e  complaint  that  caused  the  violence. 
This  is  defensible  for  two  reasons.  In  the  first  place, 
unless  the  violence  of  discontented  citizens  is  held  in 
check,  the  ^nt^ie  Jabgic  of  industry  isihiealiened.  A 
sense  of  security  is  essential  for  an  mdustrial  society 
built  on  the  principle  of  personal  liberty.  The  point  in 
issue,  so  far  as  the  government  is  concerned,  is  the  main- 
tenance of  a  rule  of  law.  No  greater  disaster  could  pos- 
sibly happen  than  the  spread  in  the  community  of  a 
contempt  for  law,  or  for  the  methods  of  settling  disputes 
which  the  law  provides. 


THE  LEGAL  FRAMEWORK  OF  INDUSTRY    55 

In  the  second  place,  the  system  of  law  under  considera- 
tion has  been  worked  out  by  self-governing  peoples, 
and  the  law  itself  may  be  changed  if  it  is  found  to  work 
an  injustice  of  any  sort.  It  is  the  first  duty  of  govern- 
ment to  grant  protection  to  all  men  who  observe  the  law 
as  it  is,  and  then  to  encourage  such  reform,  either  in  in- 
dustrial procedure  or  in  the  law,  as  will  remove  all  cause 
of  serious  conflict. 

(c)  ProtecHon^olJJontracts. — The  courts  are  an  impor- 
tant branch  of  the  government  service.  It  is  their  func- 
tion to  settle  disputes  and  protect  contracts.  The  im- 
portance of  this  task  becomes  evident  when  one  calls  to 
mind,  that  the  organization  of  industry  rests  on  agree- 
ments, and  that  the  principle  of  division  of  labor  requires 
for  its  application  the  enforcement  of  those  agreements. 
Workers  are  free  to  make  bargains  or  not,  as  they  see  fit; 
but  a  bargain  once  made,  cannot  be  broken.  To  permit 
men  to  break  their  bargains  would  result  in  the  overthrow 
of  industry,  for  all  modern  industry  rests  on  contracts 
and  agreements. 

The  lesson  to  be  learned  from  the  above  cursory  state- 
ment is,  that  government  can  never  be  separated  from 
industry.  In  the  exercise  of  its  protective  function,  it 
provides  for  that  security  without  which  no  industrial 
enterprise  would  be  undertaken.  The  protection  it 
affords,  is  essential  for  that  industrial  freedom  which  is 
in  large  measure  responsible  for  effective  and  fruitful 
work. 


CHAPTER  IV 
FACTORS  OF  PRODUCTION 

"Man's  power  over  nature  tends,  thus,  steadily  to  grow,  and  every 
stage  of  his  progress  towards  power  is  accompanied,  naturally  and 
necessarily,  with  diminished  resistance  to  his  further  efforts." — 

Henry  Carky. 

We  have  learned  what  work  is,  and  some  of  the  reasons 
why  modem  work  is  effective.  We  have  learned,  in  broad 
outline,  the  kinds  of  industries  in  which  work  is  done;  we 
have  learned,  also,  what  industrial  society  is,  so  far  as  its 
form  and  character  are  determined  by  history  and  by  law. 
We  shall  next  inquire  respecting  the  factors  of  production; 
that  is  to  say,  those  material  things  with  which  and  upon 
which  men  work. 

§  16.  The  Factors, — Land  and  Capital. — The  factors 
of  production  are  land  and  capital.  Under  these  two 
headings  may  be  grouped  all  those  things  and  forces  used 
by  workers  in  the  production  of  goods.  Many  writers  in- 
clude labor  along  with  land  and  capital  as  a  factor  of 
production,  and,  from  the  point  of  view  of  the  business 
manager,  something  may  be  said  for  such  a  classification. 
A  proper  correlation  of  these  three  elements, — ^land, 
capital,  and  labor, — is  necessary  for  efficient  work,  and  it 
is  the  pecuHar  task  of  the  manager  to  see  that  such  a 
correlation  is  realized.  It  is  natural,  therefore,  for  the 
business  manager  to  think  of  labor  as  a  commodity  to  be 
measured  and  bargained  for  in  much  the  same  way  that 
he  measures  and  bargains  for  land  and  capital. 

So  long  as  the  problem  under  consideration  is  to  explain 


FACTORS  OF  PRODUCTION  57 

profit,  or  value,  or  price,  this  narrow  point  of  view  serves 
fairly  well;  if,  however,  one  desires  to  learn  how  our  present 
industrial  society  came  to  be  what  it  is,  how  it  acts  as  an 
organization  of  men  for  co-operative  work,  and  what 
tendencies  it  holds  for  the  future,  it  is  necessary  to  dis- 
tinguish land  and  capital  as  factors  in  production  from 
labor  which,  after  all,  is  nothing  else  than  workmen  at 
work.  Land  and  capital  are  non-human  things:  they  have 
no  will;  they  respond  to  no  motive.  The  force  that  Ues 
in  labor,  on  the  other  hand,  is  put  forth  and  directed  by 
the  conscious  purpose  of  workers.  An  analysis  which 
treats  labor  as  it  is  proper  to  treat  the  material  factors  of 
production,  would  exclude  miany  considerations  that  are 
powerful  in  giving  character  to  the  modem  industrial 
world. 

§  17.  Meaning  of  Land. — The  word  "land,"  as  com- 
monly understood,  may  be  defined  as  the  dry  portion  of 
the  earth's  surface;  but  the  industrial  meaning  of  the  word 
is  summed  up  in  the  statement  that  land  furnishes  space 
for  living  and  working.  All  kinds  of  agriculture  require 
space  where  seeds  can  be  exposed  to  the  chemistry  of  the 
sun  and  the  rain,  and  growing  plants  find  standing  room 
on  the  soil.  Land  also  provides  space  for  the  building  of 
homes  or  factories,  or  for  conducting  water  or  electricity 
to  be  used  as  power  by  an  industrial  plant.  Roads  and 
highways,  railways  and  canals,  suggest  yet  another  use 
made  of  the  surface  of  the  earth.  Space  is  also  essential 
for  parks  which  cities  reserve  as  breathing  places  for 
over-crowded  populations,  or  which  the  government  sets 
aside  because  of  their  beauty  or  for  the  pleasure  of  citizens. 
It  is  thus  evident  that  the  peculiar  service  of  land,  the 
service  through  which  it  exerts  its  most  direct  influence 


58  DESCRIPTION  OP  INDUSTRY 

on  industrial  affairs  and  on  the  well-being  of  man,  is  that 
it  provides  space  for  living  and  working.  It  furnishes  op- 
portunity for  work,  and  at  the  same  time  limits  the  re- 
sults and  controls  the  form  of  work. 

The  meaning  of  the  word'  "land"  is  broadened  by 
industrial  writers  to  include  aquaculture,  mining,  and 
forestry.  This  is  quite  proper.  The  economic  laws  that 
control  these  industries  are  the  same  as  those  that  con- 
trol the  use  of  land  for  agricultural  purposes.  All  these 
industries  caU  for  space  on  the  surface  of  the  earth  and 
all  disclose  the  fact  that  different  pieces  of  land  are 
valued  differently  because  of  the  differences  in  their 
location,  their  richness  in  product,  and  their  ability  to 
produce  profit. 

The  simple  idea  of  land  has  been  yet  further  extended. 
The  modern  industrial  world  makes  use  of  many  different 
kinds  of  natural  forces,  such  as  the  force  of  gravitation 
as  realized  in  a  water  power  plant;  the  force  of  friction, 
which  gives  stability  to  the  train  moving  on  the  rails; 
the  force  generated  by  chemical  combinations,  as  exem- 
plified in  the  explosion  of  gas  in  the  cyHnder  of  a  gas 
motor,  or  the  force  of  coal  when  burned  in  moving  an 
engine,  electrical  force,  and  the  like.  These  forces  are 
given  freely  by  Nature  for  the  use  of  industry,  and  the 
relation  they  bear  to  the  success  or  failure  of  the  industrial 
enterprise  that  makes  use  of  them,  is  much  the  same  as 
that  which  the  land  of  the  farmer  bears  to  the  results  of 
agricultural  work.  It  is  for  this  reason  that  all  Nature's 
forces  and  Nature's  gifts  are  grouped  with  land  in  a  con- 
sideration of  the  factors  of  production. 

We  may  now  frame  a  more  comprehensive  definition  of 
the  word  "land."    Besides  the  direct  uses  made  of  land, 


FACTORS  OF  PRODUCTION  59 

the  word  covers  all  things  and  forces  that  Nature  sup- 
plies for  the  production  of  goods,  or  for  permitting  one 
class  of  workers  to  render  a  useful  service  to  another 
class  of  workers.  That  they  all  belong  to  the  same  group 
will  be  made  clear  when  it  is  seen  that  the  industrial  law 
of  rent  is,  in  its  broad  outlines,  the  same  for  all.  Land  is 
a  comprehensive  term;  it  covers  every  productive  factor 
not  covered  by  the  term  capital. 

There  are  two  things  which  must  be  learned  respecting 
land  as  a  factor  in  production.  The  first  is  the  commer- 
cial law  according  to  which  the  productive  forces  in  land 
submit  themselves  to  control  through  work:  the  second 
is  the  conditions  which  give  different  values  to  different 
parcels  of  land.  An  explanation  of  the  former  discloses 
what  is  termed  the  "law  of  diminishing  retiu-ns";  a 
statement  of  the  conditions  which  determine  land  values 
leads  to  a  consideration  of  the  "law  of  rent." 

§  18.  The  Law  of  Return  from  Land. — The  work  of  one 
who  tills  the  soU  consists  almost  entirely  in  directing  and 
stimulating  the  productive  forces  which  pertain  to  land. 
Nature  seems  to  have  no  special  regard  for  men.  She  is 
quite  as  willing  to  grow  weeds  for  the  flowers  they  bear 
as  to  grow  corn  for  a  harvest.  If  man  wants  com  rather 
than  weeds,  he  must  prepare  the  soil,  sow  the  seed,  cul- 
tivate the  field,  and  gather  the  harvest. 

Nature  seems  ever  willing  to  grant  the  prayer  of  work 
for  more  to  eat,  but  she  decreases  the  amount  granted 
for  each  new  petition.  The  harvest  does  not  increase  in 
proportion  to  the  work  appHed.  This  is  the  most  im- 
portant physical  fact  with  which  the  business  world  has 
to  deal.  Its  statement  is  called  the  Law  of  Diminishing 
Returns.    To  understand  the  law  of  diminishing  returns 


60  DESCRIPTION  OF  INDUSTRY 

we  must  think  of  work  as  applied  to  land  in  successive 
units  or  "doses."  We  are  then  able  to  state  the  law  as 
follows:  Each  unit  of  work  applied  to  a  given  piece  of 
land  gains  a  reward,  but  its  reward  is  less  than  that  gained 
by  the  preceding  units.  The  practical  result  bound  up 
in  this  law  is,  that  the  per  capita  harvest  decreases  as 
the  number  of  workers  increases. 

The  influences  that  affect  the  cultivation  of  land  are  so 
confusing  that  a  truthful  illustration  of  the  law  of  dimin- 
ishing returns  is  likely  to  be  misleading.  However,  if  we 
understand  that  the  purpose  of  the  illustration  which 
follows  is  to  explain  what  we  mean  by  the  law,  and  not  to 
draw  an  accurate  picture  of  farming,  it  may  be  helpful. 

Let  us  assume  that  a  man  with  a  team,  a  plow,  a  harrow, 
and  a  few  other  necessary  implements  of  agriculture, 
undertakes  to  work  a  quarter  section  of  land.  This  is 
too  much  land  for  one  man  to  cultivate.  His  plowing  is 
shallow;  he  harrows  but  one  way;  he  has  no  time  for  rolling 
the  ground;  and  he  plants  his  seeds  in  a  field  of  clods  that 
prevent  vigorous  growth.  Nevertheless,  this  may  be  the 
best  kind  of  farming  that  one  man  can  do  on  ICO  acres 
of  land,  and  experience  shows  the  farmer  that  such  culti- 
vation will  give  a  higher  rate  of  return  in  money  than  if 
he  cultivate  a  smaller  amount  of  land  and  put  in  more 
work  per  acre.  He  makes,  let  us  say,  an  average  of  five 
bushels  of  com  a  day,  counting  all  the  days  of  the  year. 
This  is  the  measure  of  what  a  given  quantity  of  land  will 
produce  under  such  cultivation.  Five  years  pass  and  the 
price  of  farm  products  has  gone  up  so  that  our  farmer  de- 
sures  to  get  more  per  acre  for  the  purposes  of  sale.  He  hires 
a  man  to  help  him;  he  buys  another  team;  he  drains 
hollows  so  that  spots  which  before  grew  nothing  now  grow 


FACTORS  OF  PRODUCTION 


61 


eomething;  in  short,  he  raises  the  grade  of  cultivation  by 
adding  more  capital  and  labor.  The  output  per  acre  will 
undoubtedly  increase,  but  it  will  not  increase  in  propor- 
tion to  the  increase  of  capital  and  labor.  When  the 
farmer  worked  alone,  the  land  paid  him  at  the  rate  of  five 
bushels  a  day.  Now  the  land  will  pay  him  and  his  helper, 
let  us  say,  nine  bushels  a  day,  which  is  at  the  rate  of  five 
bushels  for  the  farmer  and  four  for  his  helper.  The  aver- 
age return  for  work  on  the  land  has  fallen  as  the  result  of 
higher  cultivation  from  five  bushels  to  four  and  a  half 
per  man.  The  actual  return  has  increased,  but  the  rate 
of  return  has  diminished. 

This  illustration  could  be  carried  on  through  all  the 
stages  of  agricultural  development.  In  the  diagram  that 
follows,  this  is  done  until  five  men  with  an  appropriate 
amount  of  capital  are  at  work  on  a  given  piece  of  land. 

The  figures  that  appear  under  the  line  from  left  to  right 
stand  for  the  number  of  work  units  used  at  any  point  on 
the  line.  The  parallelogram  erected  over  each  figure 
represents  the  amount  of  harvest  resulting  from  the 
number  of  work  units  used.    Thus  one  work  unit  gains 


15  X 

14  X 

12  X 

9x 

6x 

5a;  product;  two  work  units  gain  9a;  product;  three  work 
units  gain  12a;  product,  and  so  on.    If  we  divide  the  prod- 


62  DESCRIPTION  OF  INDUSTRY 

uct  by  the  work  units  used  to  produce  it,  we  shall  find 
that  the  amount  produced  per  unit;  or,  if  we  assume  that 
each  work  unit  is  a  worker,  we  shall  find  the  amount 
produced  per  capita  at  each  stage  in  the  development  of 
agriculture. 

The  adjustment  of  the  figures  in  the  above  illustration 
shows  5a;  product  for  one  laborer,  or  a  per  capita  harvest 
of  5x;  it  shows  12a;  product  for  three  laborers,  or  a  per 
capita  harvest  of  4a:;  it  shows  15x  harvest  for  five  laborers 
or  a  per  capita  harvest  of  dx.  The  per  capita  harvest 
falls  as  the  number  of  workers  increases.  This  is  the  law  of 
diminishing  returns.  It  is  what  is  meant  by  those  who  say 
that  Nature  is  niggardly  in  her  dealings  with  workers. 

(a)  Proof  of  the  Law. — Such  is  a  statement  of  the  law; 
what  is  its  proof?  The  proof  of  the  law  of  diminishing 
returns  is  that  certain  things  happen  in  the  business  world 
which  could  not  be  explained  if  land  produced  a  har- 
vest in  proportion  to  work  expended  in  its  cultiva- 
tion. Assume,  for  a  moment,  that  one  x  work  brings  one 
y  product;  that  ten  x  work  brings  ten  y  product,  that  one 
hundred  x  work  brings  one  hundred  y  product,  and  so  on 
to  the  end  of  numbers.  Under  such  an  assumption  who 
would  care  to  own  land?  Manifestly,  under  such  condi- 
tions of  work,  land  would  be  as  free  as  air.  Thus  the  fact 
that  land  is  bought  and  sold,  and  that  men  desire  to  own 
land,  is  proof  that  the  products  of  land  do  not  fluctuate 
directly  with  the  amount  of  work  on  land. 

Again,  the  fact  of  migration  is  a  universal  fact  of  history. 
Migrations  which  respond  to  industrial  motives  are  com- 
monly from  countries  where  the  number  of  people  per 
square  mile  is  high,  to  countries  where  the  number  of 
people  per  square  mile  is  low.    The  State  of  Iowa,  for 


FACTORS  OF  PRODUCTION  63 

example,  is  one  of  the  most  fertile  states  in  the  Union, 
and  yet,  the  young  men  of  that  State  leave  the  farms  where 
they  worked  as  boys  to  take  up  land  in  North  Dakota  or 
Saskatchewan.  If  as  much  could  be  earned  on  the  home 
farm  as  by  working  on  the  new  lands,  there  would  be  no 
migration.  A  glance  at  the  above  diagram  shows  why 
young  men  who  wish  to  farm  leave  their  homes  to  begin 
life  in  new  fields.  At  home  they  must  work,  let  us  say, 
in  the  third  block,  where  three  units  of  work  gain  twelve 
units  of  product,  and  the  share  of  each  is  four  units;  on 
the  new  lands  they  work  in  the  first  block,  where  one  unit 
of  work  gives  five  units  of  product.  The  industrial  mi- 
gration of  agricultural  workers  is  in  obedience  to  the  law 
of  diminishing  returns;  the  fact  that  agricultural  migra- 
tion takes  place  is  proof  of  the  truth  of  the  law. 

(b)  Results  of  the  Law. — The  results  of  the  law  of  dimin- 
ishing returns  are  far  reaching.  In  the  first  place,  it  is 
this  law  which  limits  the  amount  of  product  that  workers 
will  undertake  to  produce.  Sooner  or  later  the  increased 
return  that  comes  from  an  increased  dose  of  labor  wiU  be 
reduced  to  a  point  that  no  added  labor  will  be  applied 
to  the  land,  and,  unless  there  are  new  lands  to  take  up, 
the  growth  of  industry  in  all  its  branches  will  be  ar- 
rested. 

In  the  second  place,  under  the  conditions  of  production 
imposed  by  this  law,  the  growth  of  population  means  a 
depression  of  the  standard  of  living.  It  is  of  no  use  to  say 
that  every  new  mouth  that  calls  for  food  brings  with  it  a 
pair  of  hands  to  supply  the  food  needed,  for  each  added 
pair  of  hands  must  work  harder  to  produce  the  required 
food.  Unless  other  industrial  forces  counteract  the  tend- 
ency bound  up  in  the  law  of  decreasing  returns,  an  increase 


64  DESCRIPTION  OF  INDUSTRY 

in  population  means  that  a  continually  larger  portion  of 
the  people  will  live  in  poverty. 

(c)  Criticism  of  the  Law. —  At  this  point,  some  one 
will  raise  an  objection.  At  no  time  in  the  history  of  West- 
em  peoples  has  the  general  standard  of  living  risen  so 
rapidly  as  during  the  past  one  hundred  and  fifty  years; 
and  yet  this  same  period  shows  a  phenomenal  increase  in 
population.  Does  not  this  fact  prove  the  law  of  decreas- 
ing returns  to  be  untrue?  The  United  States,  for  ex- 
ample, in  1790  had  a  population  of  3,500,000;  in  1917, 
it  was  not  far  from  105,000,000;  but  the  per  capita  prod- 
uct of  the  citizens  of  this  country  is  much  greater  now 
than  at  the  earlier  date. 

This  apparent  discrepancy  is  explained  by  two  facts, 
one  of  which  calls  for  a  slight  modification  of  our  state- 
ment of  the  law  of  diminishing  returns. 

In  the  first  place,  the  past  century  and  a  half  has  brought 
large  amounts  of  wild  land  under  cultivation.  The  in- 
dustrial crowding  of  agricultural  workers  is  relieved  by 
the  migration  of  workers  from  old  fields  to  new  and  un- 
tilled  fields.  One  of  the  most  significant  results  of  rail- 
ways, which  began  about  1830,  is,  that  they  permit  set- 
tlers to  break  away  from  the  rivers,  which  were  then  the 
only  means  of  carrying  goods  to  the  market,  and  to  strike 
out  for  those  localities  where  land  is  abundant  and  of 
high  quality.  Africa,  South  America,  Australia,  Canada 
and  certain  parts  of  Russia,  all  have  much  untilled  land, 
and  cheap  transportation  makes  these  lands  available. 
There  seems,  therefore,  to  be  no  reason  in  the  nature  of 
the  case  why  population  and  prosperity  should  not  go 
hand  in  hand  for  some  generations  yet  to  come. 

In  the  second  place,  the  kind  of  work  applied  to  land 


FACTORS  OF  PRODUCTION  65 

has  changed  during  the  past  century  and  a  half.  This 
period  is  one  of  scientific  discoveries  and  inventions.  Not 
only  have  the  numbers  of  workers  increased  but  each 
worker  is  more  productive  because  he  works  with  ma- 
chinery and  follows  scientific  methods.  The  true  state- 
ment of  the  law  of  decreasing  returns  requires  this  pro- 
viso, that  the  increase  in  labor  is  an  increase  in  work 
units  of  the  same  kind,  and  that  the  new  workers  remain 
on  the  old  lands. 

It  seems  then  that  poverty,  the  logical  result  of  the 
law  of  diminishing  returns  for  increasing  populations,  is 
set  aside  by  the  fact  that  the  new  workers  migrate  to 
new  lands,  and  that  the  spirit  of  inventions  and  the 
ability  for  industrial  organization  are  not,  as  yet,  played 
out.  Nevertheless,  the  law  of  diminishing  returns,  so 
far  as  Nature's  forces  are  concerned,  is  a  true  law.  It 
cannot  be  ignored  by  one  who  undertakes  to  explain  the 
things  that  occur  in  the  business  world.  The  time  may 
come,  [indeed  in  countries  like  China  and  India  it  has 
come,]  when  this  law  will  be  the  controlling  factor  in  in- 
dustry. 

§  19.  The  Law  of  Rent. — The  second  question  re- 
specting land  that  calls  for  answer,  pertains  to  the  fact 
that  dififerent  parcels  of  land  have  different  values.  Land 
in  the  center  of  Detroit  is  worth  $50  a  square  foot;  land 
on  farms  two  miles  from  Ann  Arbor  is  worth  $150  an 
acre:  land  in  the  upper  Peninsula  of  Michigan  is  worth 
$40  an  acre;  land  up  in  Canada  three  hundred  miles  north 
of  the  Canadian  Pacific  Railway  is  worth  nothing. 

Professor  Seager,  in  his  book  on  Economics,  has  stated 
this  fact  of  receding  value  in  the  form  of  a  diagram  which 
is  here  reproduced. 


66  DESCRIPTION  OF  INDUSTRY 

"a"  is  the  center  of  a  city  where  land  is  high.  Its  use 
is  for  building  sites  for  stores  and  offices. 

"b"  stands  for  residences, 
whether  for  rent  or  occupied 
by  their  owners. 

"c"  stands  for  lots  in  the 
I F  suburb  of  the  city,  used  for 
truck  farming  or  some  other 
form  of  intense  agriculture. 

"d"  stands  for  a  block  of 
farm  land  used  for  the  pro- 
duction of  staple  goods  like  milk,  wheat,  com,  potatoes, 
hogs,  and  the  like. 

"e"  stands  for  land  used  for  the  grazing  of  sheep  and 
cattle,  or  for  the  cutting  of  wild  hay,  and  such  like  cul- 
tivation. 

"f"  stands  for  land  yet  free,  used  for  nothing  but 
hunting,  trapping,  fishing,  etc.  It  is  land  awaiting 
cultivation. 

These  different  uses  of  land  are  not  bounded  by  lines 
as  sharp  as  the  lines  in  the  diagram.  On  the  contrary, 
the  facts  as  we  find  them  show  different  prices  of  land  in 
the  same  locality  used  differently.  Thus,  going  out  from 
the  center  of  a  city,  we  find  small  resident  lots  and  truck 
farming  side  by  side;  as  we  go  farther  out,  we  find  neigh- 
boruig  farms  devoted  the  one  to  nursery  planting,  the 
other  to  crop  farming.  There  are  no  hard  and  fast  lines 
such  as  appear  in  the  diagram,  and  yet  the  impression 
left  by  the  diagram  is  a  correct  impression.  The  kind  of 
uses  made  of  land  change  as  one  goes  from  a  dense  popula- 
tion to  a  sparse  population. 
This  is  not  only  a  fact  U>  be  observed,  but  it  is  the  essen- 


FACTORS  OF  PRODUCTION  67 

tial  fact  in  an  explanation  of  land  values.  One  use  of 
land  is  more  profitable  than  another  use  and  the  territory 
peculiarly  fitted  for  that  use  is  on  that  account  valued 
more  highly.  Of  several  pieces  of  land  some  may  be 
more  profitable  than  others,  therefore,  they  are  valued 
more  highly.  All  valuations  of  land  are  comparative, 
and  it  is  easy  to  explain  why  one  piece  of  land  is  worth 
more  than  another,  provided  we  can  find  some  place  to 
start  the  comparison.  To  find  a  starting  point  is  funda- 
mental in  the  explanation  of  land  values. 

Wherever  workers  are  able  to  claim  the  total  product 
of  their  work  because  they  pay  nothing  to  the  owner  of 
land  for  the  opportunity  of  working,  is  the  point,  or  place, 
or  location,  from  which  all  land  values  are  measured. 
This  location  is  called  the  margin  of  cultivation.  It  is 
where  the  most  crude  industrial  use  of  land  butts  up 
against  wild  land.  It  is  where  a  milUon  of  acres  of  free 
land  exist  and  only  ten  thousand  are  used  for  crude  cul- 
tivation as,  for  example,  grazing.  Manifestly,  such  land 
can  have  no  value,  except  possibly  a  speculative  value. 
One  might  as  well  speak  of  the  value  of  air.  It  is  this 
no-value  land  that  gives  us  a  starting  point  for  comput- 
ing the  value  of  those  lands  that  have  value. 

The  significant  relation  is  the  following:  what  workers 
make  on  the  border  land  of  cultivation  comes  to  be  a 
measure  of  what  they  can  get  when  working  on  lands 
that  give  higher  returns.  The  difference  between  what 
workers  make  on  land  and  what  they  can  retain  for 
themselves  goes  to  the  owner  of  the  land.  This  dif- 
ference is  rent,  and  the  rent  of  land  capitalized  is  its 
value. 

An  illustration  will  make  this  clear.     Let  us  assume 


68  DESCRIPTION  OF  INDUSTRY 

ten  units  of  work  to  be  applied  to  border  land  and  that 
it  results  in  a  product  that  can  be  sold  for  what  amounts 
to  forty  dollars  a  month  to  the  worker.  As  already  ex- 
plained, this  will  be  kept  by  the  worker.  There  will  be 
no  rent.  The  ownership  of  such  land  is  worth  nothing. 
Let  it  be  next  assumed  that,  a  thousand  miles  away,  the 
same  amount  of  work  devoted  to  agriculture  results  in  a 
product  that  can  be  sold  for  what  amounts  to  forty-five 
dollars  a  month.  In  this  case,  forty  dollars  will  go  to  the 
worker  and  five  dollars  will  be  kept  by  the  owner  of  the 
land.  Such  land  is  worth  owning.  It  gives  five  dollars 
rent;  and,  if  the  situation  is  such  that  five  dollars  rent 
comes  from  each  acre  of  land  owned,  such  land,  assuming 
interest  at  ten  per  cent,  will  be  worth  fifty  dollars  an 
acre.  The  point  of  this  illustration  is,  that  the  value  of 
the  land  and  the  rent  of  the  land  are  interchangeable 
terms.  The  value  of  land  is  the  capitalization  of  the  rent 
of  land  at  an  assumed  rate  of  interest. 

Some  one  will  ask  why  the  workers  do  not  claim  this 
excess  product  as  their  own.  Why  do  they  give  it  up  to 
the  owner  of  the  land?  The  answer  is,  they  are  forced  to 
give  this  up  by  competition  between  workers  for  the  op- 
portmiity  of  working  this  rent  producing  land.  Assume, 
for  a  moment,  that  these  workers  refuse  to  work  this  high 
grade  land  unless  they  are  permitted  to  keep  all  the  land 
produces.  Other  workers  stand  ready  to  take  their 
places.  Those  who  work  on  the  border  land  and  keep 
all  they  make,  are  receiving  only  at  the  rate  of  forty  dol- 
lars per  month,  and  they  are  ready  to  work  the  high  grade 
land  for  less  than  a  monthly  return  of  forty-five  dollars. 
Thus  competition  springs  up,  with  the  result  that  the 
lowest  price  offered  by  any  competitor  will  be  the  amount 


FACTORS  OF  PRODUCTION  69 

that  can  be  made  on  the  no-rent  land.  The  difference 
between  this  amount  and  what  land  anywhere  produces, 
will  go  to  the  owner  of  the  land  as  the  price  charged  by 
him  for  the  opportunity  of  working  on  high  grade  rather 
than  low  grade  land. 

This  relation  between  the  workers'  return  and  the 
owner's  return  may  be  expressed  in  another  way.  The 
amount  of  wheat  needed  at  any  time  depends  on  the 
number  of  people  living,  and,  since  bread  is  a  necessary 
article  of  diet,  we  have  the  right  to  say  that  the  amount 
needed  will  be  produced.  If  now,  there  is  a  sufficient 
amount  of  high  grade  land  to  produce  all  the  wheat  that 
is  needed,  the  price  paid  for  wheat  would  be  its  cost  on 
the  best  land.  This  must  be  returned  to  the  workers. 
There  will  be  no  rent.  If,  however,  there  is  not  a  sufficient 
amount  of  first  grade  land  to  produce  the  needed  amount 
of  wheat,  or  if  the  location  of  a  part  of  this  first  grade 
land  is  far  from  the  market,  a  different  result  will  follow. 
The  price  for  wheat  would  then  come  to  be  its  cost  of 
production  where  it  costs  the  most,  and  since  those  farms 
that  produce  for  a  less  cost  will  receive  the  market  price 
for  what  they  produce,  such  farms  will  command  a  rent 
and  consequently  have  a  value.  A  simple  diagram  will 
make  this  clear. 


c 

B 

A 

A,  B,  and  C  represent  three  blocks  of  land.  Let  us 
assume  that  all  are  equally  good  so  far  as  the  soil  is  con- 
cerned, but  that  they  lie  at  different  distances  from  the 
market  which,  in  the  diagram,  is  supposed  to  lie  in  block  A. 


70  DESCRIPTION  OF  INDUSTRY 

Let  us  further  assume,  for  purpose  of  illustration,  that 
all  the  wheat  needed  can  be  produced  on  the  land  in 
block  A  and  that  it  can  be  produced  at  a  cost  of  $1.00 
a  bushel.  The  price  on  the  market  will  be  $1.00  and  no 
land  outside  of  block  A  will  be  cultivated  for  wheat. 
Further,  since  the  market  price  and  the  cost  are  the 
same,  there  will  be  no  surplus  to  bring  rent  or  value  of 
land  into  existence. 

Let  us  assume  in  the  next  place  that  population  increases, 
that  more  wheat  is  needed,  and  that  this  increased  amount 
of  wheat  can  be  produced  cheaper  by  cultivating  land 
in  block  B  than  by  putting  more  work  on  the  farms  in 
block  A.  This  means  that  a  new  cost  mark  is  raised  for 
wheat.  It  is  now  the  cost  in  block  B  rather  than  in 
block  A  that  makes  the  market  price.  The  new  cost 
mark  may  be  $1.25  per  bushel  rather  than  $1.00  per 
bushel  as  before.  But  the  cost  in  block  A  is  still  one 
dollar,  and  if  wheat  produced  at  one  dollar  cost  is  sold 
for  one  dollar  and  twenty-five  cents,  the  difference,  or 
twenty-five  cents  on  each  bushel,  is  kept  by  the  owner  of 
the  land.  If  sixteen  bushels  of  wheat  are  produced  on 
an  acre  of  land,  each  acre  will  yield  the  owner  four  dollars 
a  year  as  rent. 

A  similar  result  follows  the  use  of  land  in  block  C, 
where  perhaps  it  will  cost  $1.50  a  bushel  to  raise  wheat 
and  carry  it  to  the  market.  The  price  is  now  deter- 
mined by  the  cost  on  land  C.  A  rental  return  of  25 
cents  a  bushel  appears  on  land  in  block  B,  and  the  rental 
return  on  land  in  block  A  is  raised  to  fifty  cents  a  bushel. 

The  real  situation  is  not,  of  course,  as  simple  as  it 
appears  from  this  illustration.  There  are  hundreds  of 
grades  of  land  on  which  wheat  can  be  raised;  there  are 


FACTORS  OF  MODUCTION  71 

thousands  of  uses  to  which  land  can  be  put  besides  the 
raising  of  wheat.  These  may  be  passed  with  the  assur- 
ance that  nothing  different  and  nothing  new,  so  far  as 
principle  is  concerned,  would  be  disclosed  by  a  detailed 
study  of  every  conceivable  use  to  which  land  may  be  put. 

Our  conclusion  is  as  follows.  The  rental  value  of  any 
piece  of  land  rests  on  the  difference  between  the  cost  of 
producing  those  goods  for  the  production  of  which  it  is 
used,  and  the  market  price  of  such  goods.  The  value  of 
the  land  is  what  one  is  willing  to  give  for  the  right  to 
receive  annually  the  rent  which  the  land  commands. 

§  20.  Meaning  of  Capital. — Two  factors  in  produc- 
tion, land  and  capital,  cover  all  things  and  forces  used 
by  workers  as  means  to  production.  The  significant  in- 
dustrial fact  respecting  land  is  that  it  provides  workers 
with  standing  ground  for  work;  the  significant  industrial 
fact  respecting  capital  is  that  it  provides  workers  with 
tools,  and  machines,  and  training  with  which  to  work. 
(We  may  then  define  capital  as  the  product  of  past  work 
designed  to  assist  future  production.  )  This  is  sometimes 
expressed  in  another  way.  "Capital,"  it  is  said,  "con- 
sists of  wealth  used  to  help  us  in  producing  more  wealth." 
These  two  statements  mean  much  the  same  thing,  the 
chief  difference  between  them  being  that  one  looks  on 
industry  from  the  point  of  view  of  work,  and  the  other 
from  the  point  of  view  of  wealth.  We  shall  endeavor  to 
maintain  the  former  point  of  view  throughout  this  analysis 
of  capital. 

"The  great  advantage  of  capital,"  says  Professor 
Jevons,  "is  that  it  enables  us  to  do  work  in  the  least. 
laboriousway.  If  a  man  wants  to  convey  water  from  a 
well  to  his  bouse,  and  has  very  little  capital,  he  can  only 


72  DESCRIPTION  OF  INDUSTRY 

get  a  bucket  and  carry  every  bucket-full  separately;  this 
is  very  laborious.  If  he  has  more  capital,  he  can  get  a 
barrel  and  wheel  it  on  a  barrow,  which  takes  off  a  large 
part  of  the  weight;  thus  he  saves  much  labor  by  the  labor 
spent  upon  the  barrel  and  barrow.  If  he  has  still  more 
capital,  his  best  way  will  be  to  make  a  canal,  or  channel, 
or  even  to  lay  a  metal  pipe  all  the  way  from  the  spring 
to  his  house;  it  costs  a  great  deal  of  labor  at  the  time, 
but,  when  once  it  is  made,  the  water  will  perhaps  run 
down  by  its  own  weight,  and  all  the  rest  of  his  life  he  will 
be  saved  from  the  trouble  of  carrying  water." 

The  above  quotation  makes  clear  three  things  respect- 
ing capital: 

First.  Capital  is  a  help  to  work,  and  permits  the  re- 
sults for  which  work  is  undertaken  to  be  attained  with 
less  expenditure  of  time  and  energy  on  the  part  of  the 
worker  than  otherwise  might  be  necessary.  The  sub- 
stitution of  a  barrel  and  a  barrow  for  a  bucket  in  carrying 
water  illustrates  this  class  of  benefits. 

Second.  Capital  is  a  substitute  for  work.  The  laying 
of  the  pipe  which  makes  it  unnecessary  for  the  man  to 
carry  water  at  all  shows  what  is  meant  by  the  substitu- 
tion of  capital  for  labor.  The  pipe  enables  the  force  of 
gravity  to  do  what  before  was  done  by  the  direct  ex- 
penditure of  human  strength. 

Third.  The  service  of  capital  as  a  factor  in  production 
may  be  stated  without  regard  to  ownership.  Questions 
raised  by  the  private  ownership  of  capital  are  not  neces- 
sarily included  in  a  chapter  that  deals  with  capital  as  a 
factor  in  production.  In  what  follows  we  shall  try  to 
keep  clearjof  ^i3_ownerabip_  question. 

Some  light  will  be  thrown  on  the  meaning  of  the  word 


FACTORS  OF  PRODUCTION  73 

"capital,"  if  we  pass  in  review  the  various  classes  of 
things  called  capital. 

(a)  Improvements  in  Land. — All  improvements  in  land 
are  properly  classed  as  capital  except  those  that  are  in- 
cidental to  the  tilling  of  the  soil.  F^ces^,  bams^_sijos, 
and  the  like,  are  capital.  Plows,  cultijvators^eapers, 
m^wejs^hayi  rakes,  and  the  like;  in  short,  all  the  tools, 
implements  and  machinery  used  by  the  farmer  in  raising 
and  gathering  a  harvest,  are  farming  capital.  Ditches 
for  draining,  hedges  used  instead  of  fences,  the  trees  in 
the  orchard,  the  plants  in  the  vineyard,  are  capital.  All 
these  things  and  forces  of  like  character  are  the  product 
of  past  work  devoted  to  future  production. 

It  is  thus  evident  that  a  farm,  as  we  understand  that 
word,  has  a  value,  part  of  which  is  the  value  of  the  land, 
and  part  of  which  is  the  value  of  the  investments  on  the 
land;  that  is  to  say,  of  the  capital.  This  distinction 
applies  equally  to  the  town  dwelling  or  to  any  unit  of 
property  in  which  the  land  element  is  the  more  im- 
portant. Land,  with  its  improvements,  is  commonly 
called  real  estate,  and  is  bought  and  sold  without  recog- 
nizing that  both  of  the  factors  in  production  are  covered 
by  the  bargain.  The  line  that  separates  land  from  cap- 
ital must  not  be  lost  to  view  in  a  description  of  the  pro- 
ductive factors. 

(b)  Mgmifachmzig^  Machinery. — The  greater  part  of  the 
value  of  a  manufacturing  plant  represents  capital  rather 
than  land.  The  building  in  which_the^_glantJsJioused; 
the  machinery  used  in  the  process  of  production;  the 
engines  which  provide  the  power  for  the  movement  of 
the  machinery;  the  canals  which  transport  the  power,  if 
water  is  used;  the  dynamos,  the  sub-stations,  and  the 


74  DESCRIPTION  OF  INDUSTRY 

transportation  wires,  if  the  factory  in  question  relies  upon 
electrical  power;  all  these  are  capital  used  in  the  process 
of  manufacture.  They  are  all  the  product  of  past  work 
used,  or  to  be  used,  for  current  and  future  production. 
The  preponderance  of  the  value  in  most  manufacturing 
enterprises  represents  capital_^ratheiLthan  land. 

(c)  Property  used  in  TransygrtaMon. — Three  elements 
are  involved  in  the  transportation  service.  These  are, — 
the  way,  the  vehicle,  an^_the_power.  A  railway,  for  ex- 
ample, has  a  right  of  way  upon  which  the  ties  and  rails 
rest;  its  vehicle  is  the  cars  in  which  passengers  and  goods 
are  carried;  and  the  power  for  steam  railways  is  fur- 
nished by  the  locomotive.  From  this  statement  it  is 
evident  that  a  very  considerable  portion  of  the  value  of 
a  railway  exists  in  the  form  of,  capital_rather  than  in  the 
form  of  land.  In  the  case  of  water  transportation,  prac- 
tically all  of  the  value  of  the  property  used  stands  for 
capital.  Companies  engaged  in  the  transfer  business 
make  use  of  capital  in  the  form  of  automobiles,  or  of 
wagons  and  horses.  If  wharves,  docks,  warehouses, 
elevators,  stock  yards,  and  the  like,  are  included  with 
transportation  property,  capital  comes  to  be  relatively 
of  more  importance.  The  point  for  us  to  notice  is  that 
the  portion  of  the  property  which  is  the  product  of  work 
rather  than  a  gratuity  of  Nature,  is  properly  classed  as 
capital. 

(d)  Stock  Awaiting  Sale. — In  the  classification  of  indus- 
tries submitted  in  Chapter  II,  attention  was  called  to 
the  fact  that  mprnhnnts  atp  prndiiof^rs.  They  perform 
the  service  of  holding  goods  in  large  quantities  until  such 
time  as  buyers  may  care  to  purchase.  The  compensa- 
tion which  they  exact  is  the  difference  between  the  amount 


FACTORS  OF  PRODUCTION  75 

paid  for  the  goods  and  the  amount  received  when  the 
goods  are  sold.  This  fund  of  goods  held  for  future  sales, 
whether  such  sales  are  to  manufacturers  or  to  the  ul- 
timate consimier,  are  properly  classed  as  capital.  They 
are  the  product  of  past  labor  devoted  to  future  pro- 
duction. 

In  what  manner,  it  may  be  asked,  is  a  fund  of  wheat 
carried  by  a  wheat  merchant,  or  a  stock  of  cloth  carried 
by  the  merchant  tailor,  devoted  to  future  production? 
The  answer  to  this  question  is  simple,  provided  we  hold 
to  the  point  of  view  of  production.  One  service  of  capital 
is  to  enable  workers  to  work  in  a  roundabout  way.  In 
order  that  co-operative  work  may  be  efficient,  the  work 
of  to-day  may  not  result  in  the  production  of  consumable 
goods  until  two,  three,  four,  or  five  years  have  elapsed. 
Unless  the  market  were  stocked  with  large  funds  of  con- 
sumable goods,  workers  could  not  afford  to  work  in  this 
roundabout  way.  They  would  be  obliged  to  give  their 
time  and  strength  to  the  production  of  those  things  re- 
quired for  immediate  consumption.  It  is  thus  clear  that 
the  existence  of  a  large  stock  of  consumable  goods  is 
essential  for  eflficient  production,  and  that  this  stock  of 
goods  renders  a  service  quite  the  same  in  its  results  as  the 
machinery  which  represents  capital  invested  in  a  manufac- 
turing plant.  One  functionof  capital  is  to  overcome  the 
adverse  element  of  time  in  industry.  This  function  is 
served  by  a  stock  of  goods  laid  by  out  of  the  product  of 
the  past,  and  consumed  by  present  workers  while  they 
are  engaged  in  the  production  of  things  that  require  two 
or  three  years  for  their  production.  It  is  in  this  sense  and 
for  this  reason  that  stocks  of  goods  carried  by  merchants 
are  classified  as  capital. 


76  DESCRTPTION  OF  INDUSTRY 

(e)  Organizalion. — The  business  world,  as  we  know  it, 
is  made  up  of  organized  industries.  Partnerships,  cor- 
porations, partnerships  of  corporations,  and  the  like,  are 
facts  of  common  observation.  An  individual,  also,  by 
continuing  in  a  particular  line  of  business  for  a  period  of 
years,  may  have  built  up  a  business  which,  in  the  ordinary 
language  of  the  street,  is  a  "going  concern."  It  is  easy 
to  see  that  houses,  machines,  and  physical  improvements 
of  all  sorts  are  the  result  of  past  labor  to  be  used  for  future 
production;  the  organization  of  a  business  is  quite  the 
same  thing.  An  engineer,  for  example,  may  construct  a 
railway.  It  is  made  up  of  rails,  ties,  bridges,  culverts, 
and  all  the  elements  of  the  right  of  way;  it  includes  station 
houses,  round  houses,  switching  yards,  and  other  physical 
units;  but  these  things  are  merely  the  dry  bones  of  busi- 
ness. They  must  be  brought  together  and  used  for  ren- 
dering the  service  of  transportation  before  a  transporta- 
tion industry  is  created.  This  takes  time.  It  requires 
work.  There  is  no  reason  why  capital  should  be  defined 
so  as  to  include  the  physical  units  devoted  to  industry 
and  to  exclude  business  organization. 

(f)  Training  for  Industrial  ^Sgzmcg. — The  question  is 
sometimes  asked  whether  or  not  an  education,  by  which 
men  are  prepared  to  play  their  part  in  the  business  world, 
is  capital.  Under  our  definition,  the  reply  is  in  the  affirm- 
ative. Training  for  specialized  work,  or  indeed  training 
of  any  sort  which  renders  men  more  fit  to  perform  in- 
dustrial service,  is  capital.  It  is  the  result  of  work  to  be 
used  in  future  production.  Like  a  labor-helping  or  labor- 
saving  machine,  it  increases  the  efficiency  of  work,  and 
results  in  the  production  of  a  larger  amount  and  a  higher 
grade  of  services  than  otherwise  would  be  the  case.    The 


FACTORS  OF  PRODUCTION  77 

industrial  training  of  an  individual  is  not  only  personal 
capital,  but  it  adds  to  the  fund  of  national  capital. 

(g)  Is^Money  Capitalf — There  is  no  objection  to  saying 
that  money  is  capital,  provided  we  know  what  is  meant. 
Money  is  a  device  used  to  facilitate  exchanges.  In  a 
complicated  business  world  like  the  one  in  which  we  live, 
a  world  which  is  carried  on  by  the  buying  and  selling  of 
goods,  and  which  is  organized  for  production  by  agree- 
ments and  contracts  between  various  classes  of  workers, 
there  must  be  some  commodity  or  thing  that  is  used  as  a 
measure  for  exchanges,  and  for  the  wording  of  contracts. 
The  nature  and  functions  of  money  cannot  be  considered 
here.  For  the  present,  it  is  only  necessary  to  recognize 
that  money  is  not  in  itself  capital.  Its  possession  means 
simply  that  the  man  who  has  it  has  the  right  to  claim  a 
certain  portion  of  existing  capital.  Let  us  assume  that 
a  man  wishes  to  build  a  new  cotton  factory.  What  he 
wants  is  brick  and  mortar  with  which  to  construct  the 
building,  and  the  services  of  men  to  make  the  machinery 
and  adjust  the  plant.  This  he  can  secure  provided  he 
has  money,  but  he  does  not  build  the  factory  out  of  money. 
Money  is  simply  the  means  used  to  command  labor. 
Workers  are  willing  to  give  their  time  in  exchange  for 
money,  because  they  know  that  with  money  they  can 
buy  the  goods  on  which  they  must  subsist  during  the 
time  that  the  factory  is  in  process  of  construction.  It 
is  this  subsistence  fund,  then,  and  the  tools  and  ma- 
chinery used  by  labor  in  creating  the  factory,  that  con- 
stitutes the  capital.  The  correct  answer  to  the  ques- 
tion, then,  seems  to  be  the  following:  Money  may  be  talked 
about  as  though  it  were  capital.  For  most  of  the  questions 
that  arise,  no  error  results  from  treating  money  as  capital. 


78  DESCRIPTION  OF  INDUSTRY 

It  is,  however,  iaitself  merely  a  claim  on  capital,  whether 
such  capital  is  invested  or  free  for  future  investment. 

§  21.  Capital  Maintenance  and  Capital  Building. — 
At  any  particular  time  the  business  world  has  in  its  pos- 
session a  definite  amount  of  capital.  This  may  be  in 
fixed  forms  such  as  buildings,  machinery,  embankments 
for  water  power,  and  other  similar  permanent  forms  of 
industry,  or  it  may  be  in  a  free  form  such  as  stocks  of 
foodj^f  clothing,  and  the  like,  in  the  hands  of  merch- 
ants, which  may  be  used  to  support  workers  in  any  of 
many  lines  of  work.  The  amount  of  capital,  as  compared 
with  the  population,  measures  fairly  well  the  stage  of 
industrial  progress  at  which  a  country  has  arrived.  This 
is  true  because  capital  consists  of  those  things  that  are 
a  help  to  workers,  and  we  may  assume  that  all  capital  is 
wisely  applied.  The  creation  of  such  a  fund  of  capital 
is  the  result  of  capital  building  in  past  years,  and  any 
increase  in  that  fund  from  year  to  year  shows  that  a 
certain  number  of  men  is  engaged  in  capital  build- 
ing. 

Another  fact  is  of  equal  importance.  As  the  increase 
in  the  capital  fund  measures  industrial  progress,  so  a 
decrease  in  that  fund  measures  industrial  decay.  The 
capital  fund,  therefore,  must  be  maintained,  and  its  main- 
tenance must  be  assumed,  before  it  is  possible  to  talk  of 
building  more  capital.  For  this  reason  we  first  consider 
the  process  of  maintenance. 

(a)  Maintenance  of  Qamtal._ — The  meaning  of  the  word 
maintenance  may  be  made  clear  by  an  illustration.  A 
locomotive  hauls  a  train  from  Detroit  to  Jackson  and 
burns  five  tons  of  coal  on  the  trip.  The  coal  has  disap- 
peared.   It  has  gone  up  in  smoke,  but  what  it  cost  is  in 


FACTORS  OF  PRODUCTION  79 

the  hands  of  the  railway  company  as  revenue  earned  on 
the  freight  which  the  locomotive  hauled.  If,  now,  the 
locomotive  is  to  pull  the  train  back  on  the  next  day,  its 
tender  must  be  filled  again  with  coal.  Thus  we  see  that 
the  amount  of  coal  required  for  running  the  locomotive 
is  maintained  in  the  tender  by  constant  replacements. 
A  sufficient  sum  must  be  taken  from  current  earnings 
to  replace  the  coal  burnt  each  day. 

So  far  as  maintenance  is  concerned,  however,  there  is 
no  difference  between  the  burning  of  coal  and  the  wear- 
ing out  of  the  locomotive,  except  the  thjis.  required  for 
each  process.  The  coal  disappears  on  a  single  trip; 
the  locomotive  lasts  for  25  years.  Just  as  the  coal  when 
burned  must  be  replaced  if  the  locomotive  is  to  run,  so 
the  locomotive  must  be  replaced  when  worn  out  if  the 
capital  fund  of  the  railway  is  to  remain  intact.  Men  in 
the  coal  fields  must  continually  dig  coal  to  keep  the  loco- 
motive supplied;  in  the  same  way,  the  mechanics  in  the 
shops  must  be  continually  engaged  in  making  locomo- 
tives to  replace  those  that  are  worn  out  and  scrapped. 
From  this  illustration  it  is  clear  that  while  the  capital 
fund  is  maintained  as  a  fixed  amount  from  year  to  year, 
this  is  done  by  the  current  production  of  new  units  of 
capital  which  replace  those  worn  out.  It  is  also  clear 
that  certain  amounts  of  current  work  must  be  devoted 
to  the  maintenance  of  the  capital  fund. 

The  above  illustration  of  the  replacement  of  worn  out 
locomotives  is  of  universal  application.  The  food  supply 
is  capital  because  it  is  designed  to  sustain  workers  while 
engaged  in  current  production.  The  harvest  of  each  fall 
replaces  the  consumption  of  food  during  the  year.  The 
ability,  the  skill,  the  efliciency  of  the  present  generation 


80  DESCRIPTION  OF  INDUSTRY 

is  maintained  because  it  is  replaced  by  that  of  the  next 
generation.  This  is  the  purpose  of  schools  and  appren- 
ticeships. Even  business  organization  as  a  phase  of 
capital  is  maintained  through  the  constant  effort  of 
those  who  manage  the  business.  A  very  large  share  of 
current  work  is  devoted  to  the  maintenance  of  the  exist- 
ing capital  fund. 

(b)  Capital  Building. — The  process  of  capital  building 
is  not  different,  so  far  as  work  is  concerned,  from  that 
of  capital  maintenance.  If  all  industries  were  owned  by 
a  single  corporation  or  by  the  government,  it  would  be 
found  that  a  definite  portion  of  current  work  would  be 
devoted  each  year  to  an  increase  of  the  current  capital 
fund,  and  that  such  work  would  be  directed  to  satisfy 
the  most  pressing  needs  for  new  capital.  In  the  case  of 
the  railway  industry  of  the  United  States,  for  example, 
if  it  should  be  found  that  65,000  locomotives  were  not 
able  to  do  the  work  of  transportation,  the  shops  would 
be  ordered  to  produce  a  thousand  new  locomotives.  This 
would  be  an  increase  of  the  capital  invested  in  locomo- 
tives, and  make  an  addition  to  the  general  capital  fund. 
This  illustration  is  typical  of  the  process  of  capital  build- 
ing. In  a  progressive  community,  a  certain  portion  of 
its  total  work  must  be  continuously  assigned  to  the  build- 
ing of  new  capital. 

It  is  common  to  say  that  new  capital  is  the  result  of 
personal  saving.  A  man  has  an  income  of  $5,000  and 
spends  $4,000  in  living  expenses.  He  invests  the  $1,000 
which  he  has  saved  in  the  building  of  a  new  industry.  So 
far  as  an  individual  is  concerned,  this  may  perhaps  explain 
how  a  man  can  increase  his  capital  investments,  [but  it 
fails  to  picture  the  process  of  capital  building  as  a  phase 


FACTORS  OF  PRODUCTION  81 

of  industrial  growth,  j  For  the  explanation  of  this  process 
we  must  go  a  little  deeper  into  the  process. 

Let  us  grasp  firmly  the  idea  that  product,  whether  of 
past  work  or  current  work,  passes  through  the  capital 
fund  to  be  consumed.  The  machinery  is  in  the  hands  of 
the  manager.  The  food  stock  is  in  the  hands  of  the  merch- 
ant. It  is  all  in  the  process  of  being  consumed.  The  coal 
burned  and  the  food  consumed  must  be  replaced  by  cur- 
rent labor  as  well  as  the  machinery  worn  out. 

Let  us  grasp,  in  the  second  place,  the  fact  that,  at  any 
particular  time,  there  is  an  estabUshed  standard  of  living, 
and  that  the  stock  of  consumable  goods  in  the  hands  of 
merchants  will  be  bought  for  current  consumption  up 
to  the  full  measure  of  that  standard. 

Let  us  grasp,  in  the  third  place,  the  market  conditions 
under  which  new  capital  may  be  built.  If  the  stock  in 
the  hands  of  merchants  is  not  greater  than  the  amount 
which  will  be  bought  under  the  established  standard  of 
living,  no  increase  in  the  capital  fund  is  possible.  All 
available  work  will  be  needed  to  keep  up  production  for 
current  consumption.  If,  however,  some  of  this  stock 
remains  unsold  after  the  usual  demand  for  consumption 
has  been  satisfied,  the  existence  of  this  surplus  is  proof 
that  too  much  work  has  been  given  to  the  production  of 
the  kinds  of  goods  that  the  standard  of  living  demands. 
This  means  that  a  portion  of  the  customary  work  done  to 
supply  the  customary  demand  will  be  freed  from  this 
work,  and  become  available  for  work  of  another  sort.  It 
is  available  for  the  building  of  new  industries,  new  invest- 
ments, and  the  making  of  new  lines  of  goods.  That  is 
to  say,  it  is  available  for  capital  building. 

It  is  not  neoessary  to  bring  the  idea  of  personal  saving 


82  DESCRIPTION  OF  INDUSTRY 

and  personal  sacrifice  into  the  explanation  of  capital 
building. 

§  22.  The  Law  of  Return  from  Capital.  — We  have 
learned  that  the  capacity  of  a  piece  of  land  to  produce 
tends  to  decrease  as  added  units  of  work  are  applied. 
This  was  called  the  law  of  diminishing  returns.  We  also 
learned  that  the  value  of  land,  or,  what  amounts  to  the 
same  thing,  the  rent  that  workers  are  wilUng  to  pay  for 
the  use  of  land,  springs  from  the  fact  that  there  is  not 
enough  first-class  land  to  supply  the  market  demand  for 
land  products.  It  is  natural  to  ask  if  capital,  as  a  factor 
in  production,  is  subject  to  the  same  industrial  law  as 
land.    Is  capital  subject  to  the  law  of  diminishing  returns? 

In  the  case  of  land,  if  land  of  the  first  quality  is  not 
sufficient  to  produce  all  that  is  needed,  land  of  an  inferior 
grade  will  be  brought  under  cultivation.  This  is  not  true 
of  capital.  Capital  is  the  product  of  work,  and  can  be 
created  whenever  there  is  need  for  an  increased  production 
of  capital  products.  (From  this  it  follows  that  only  capital 
of  the  first  grade  will  be  continuously  used/)  and  that  as 
much  of  it  will  be  used  as  production  requires.  It  may 
take  time  to  bring  this  about,  but  the  tendency  is  for 
an  adequate  amount  of  first-grade  capital  to  be  pro- 
duced. 

This  fact  has  a  very  important  industrial  result.  So 
far  as  capital  is  concerned,  the  cost  of  making  a  product 
which  the  market  requires  will  be  the  same  for  all  the  units 
of  that  product  that  are  offered  for  sale.  There  is  no  such 
thing  as  one  portion  being  made  for  any  considerable 
period  of  time  at  one  capital  cost,  and  another  portion 
at  another  capital  cost;  and,  consequently,  there  is  no 
such  thing  as  a  rental  returo  to  the  owner  of  capital. 


FACTORS  OF  PRODUCTION  83 

The  return  on  capital  is  a  constant  return.  This  is  the 
law  of  capital  corresponding  to  the  law  of  diminishing 
return  on  land. 

Two  results  follow.  In  the  first  place,  we  are  able  to 
understand  what  business  men  mean  when  they  speak 
of  the  normal  or  average  return  on  capital.  It  means  that 
there  are  no  permanent  differences  in  the  rate  of  income 
allowed  capital.  Should  the  actual  return  of  a  particular 
investment  be  higher  than  the  average,  it  will  tend  to 
fall  because  new  capital  will  come  into  that  business 
and  force  the  income  down.  Should  the  actual  returns 
be  lower  than  the  average  or  normal  income,  some  of  the 
capital  will  be  withdrawn  from  such  a  business  and  the  in- 
come forced  up.  There  is  thus  a  tendency  to  an  average 
or  normal  income,  or  constant  rate  of  return  on  capital  in 
all  industries.  There  is  no  average  rent;  but  there  is  an 
average  capital  income  or,  as  it  is  commonly  expressed, 
an  average  rate  of  interest. 

The  fact  that  capital  is  produced  by  work,  fixes  the 
valuation  placed  on  capital  goods.  Any  property  used 
as  capital  will  be  worth,  at  any  time,  what  it  would  cost 
to  reproduce  it.  It  cannot  be  worth  more,  for  no  one  will 
give  more  for  it.  Should  the  owner  ask  more,  the  pro- 
spective buyer  will  refuse  to  buy.  He  knows  he  can  re- 
produce the  thing  for  less  money.  Thus  the  cost  of  re- 
production is  the  maximum  value  that  will  be  placed  on 
capital  goods.  Should  the  buyer  offer  less  than  the  amount 
of  money  required  to  reproduce  the  capital,  the  owner 
(provided,  of  course,  that  the  capital  is  producing  the 
normal  return)  will  refuse  to  sell.  C  This  then  is  the  law 
for  the  valuation  of  a  capital  investment.  Its  market  price 
will  equal  the  estimated  cost  of  reproduction^ 


84  DESCRIPTION  OF  INDUSTRY 

The  lessons  of  the  foregoing  analysis  are  as  follows: — 
Land  is  a  given  factor,  limited  in  amount, 
Capital  is  a  produced  factor  and  unlimited  in  amount, 
Land  of  many  grades  is  used  to  supply  market  needs, 
Capital  of  the  best  grade  only  tends  to  be  used  to 

supply  market  needs, 
Land,  as  used,  is  subject  to  the  law  of  diminishing 

returns, 
Capital,  as  used,  is  subject  to  the  law  of  constant 

returns, 

(The  value  of  land  is  determined  by  the  rent  which  the 
land  bears. 
The  value  of  investments  of  capital  tends  to  the  cost 
of  their  reproduction. 
These  are  the  general  truths  that  pertain  to  land  and 
capital  as  factors  of  production.  Many  apparent  excep- 
tions may  be  noted  by  a  close  observer  of  the  business 
world,  but  such  exceptions  need  not  be  considered  until 
after  we  have  learned  something  more  of  the  nature  of 
competition,  the  character  of  the  market  and  the  laws  of 
price. 


CHAPTER  V 
MACHINERY  IN  INDUSTRY 

"The  Industrial  Revolution  was  not  the  result  of  the  great  me- 
chanical inventions:  rather  the  inventions  were  the  result  of  the 
Revolution." — J.  Dorsey  Forrest. 

Thus  far  we  have  learned  that  the  organization  of 
industry  is  directed  by  the  principle  of  division  of  labor 
and  that  industrial  efficiency  is  greatly  increased  thereby. 
We  have  also  learned  that  the  legal  framework  of  our 
business  world  has  been  fashioned  under  the  influence 
of  the  principle  of  liberty;  that  the  free  play  of  personal 
interest  is  granted  by  this  principle;  and  that  this  is  a 
strong  stimulus  to  effective  work.  But  these  principles 
do  not,  by  themselves,  explain  the  marvelous  produc- 
tive capacity  of  modem  industrial  methods.  That  ex- 
planation is  bound  up  with  the  development  of  maflhin- 
ery.  It  is  the  purpose  of  this  chapter  to  recite  the  story 
of  that  development  and  to  trace  its  influence  on  the 
modem  business  world.  The  story  deals  with  what  is 
called  The  Industrial  Revolution. 

§  23.  The  Industrial  Revolution. — The  industrial  rev- 
olution is  the  most  important  event  in  the  development 
of  the  English  speaking  world  since  the  16th  century. 
The  influence  which  it  exerted  upon  business  methods 
and  business  organization  is  exceeded  only  by  the  recogni- 
tion of  the  institution  of  private  property.  In  one  sense 
this  is  not  a  revolution  but  an  evolution.  The  industrial 
forces  which  it  liberated  are  not  yet  exhausted,  nor  are 

85 


86  DESCRIPTION  OF  INDUSTRY 

the  paths  of  experiment  and  discovery  which  it  opened  up 
fully  occupied  even  in  our  own  time. 

In  another  sense,  however,  the  industrial  revolution 
stands  for  a  sudden  and  radical  change.  It  raised  a  new 
point  of  view  from  which  to  regard  industry.  It  means 
that  business  men,  almost  within  a  generation,  came  to 
understand  the  role  of  machinery  in  industry.  The 
change  covered  by  this  so-called  Revolution  was  a  change 
in  method,  a  change  in  purpose  and  a  change  in  the  out- 
look of  business  men.  It  is  in  this  latter  sense,  the  psy- 
chologic sense,  that  we  now  use  the  phrase  Industrial 
Revolution. 

It  must  not  be  thought  that  the  industrial  revolution 
is  in  any  sense  a  local  affair.  Australia  and  Canada  and 
other  English  speaking  colonies,  as  well  as  the  United 
States,  have  accepted  and  are  working  out  the  new  in- 
dustrial point  of  view.  The  nations  of  Europe,  the  Latin 
peoples  of  South  America,  and  Japan  among  Oriental 
peoples,  are  what  they  are  to-day  because  of  the  change 
in  industrial  methods  and  ideals  that  began  in  England 
in  the  latter  part  of  the  18th  centurvj^and  what  is  called 
the  awakening  of  China  is,  in  fact,  the  recognition  on  the 
part  of  that  ancient  people  of  the  necessity  of  adjusting 
their  industrial  life  to  the  new  industrial  conditions  of 
the  Western  world.  We  are  here  dealing  with  a  compre- 
hensive, a  fundamental,  and  a  worldwide  influence, — an 
influence  which,  however,  in  some  of  its  phases,  has  been 
carried  farther  in  the  United  States  than  in  any  other 
country. 

(a)  Control  of  Power. — On  its  formal  side  the  industrial 
revolution  consists  in  a  substitution  of  machinery  Jor 
tools.    No  definite  line  can  be  drawn  between  a  tool  and 


MACHINERY  IN  INDUSTRY  87 

a  machine,  but  a  significant  difference  in  the  manner  of 
their  working  may  be  noticed.  An  industrial  society 
that  rests  on  tools  is  limited  in  its  growth  as  well  as  in 
its  annual  production.  The  fund  of  muscular  and  ner- 
vous energy  that  inheres  in  its  workmen,  the  number  of 
workmen  and  the  degree  of  skill  used  by  them, — these 
are  the  elements  that  measure  the  productive  capacity 
of  an  industry. based  on  tools. 

This  is  not  true  of  an  industry  based  on  machinery. 
In  this  case  it  is  the  available  power  oj_nature,  rather 
than  the  labor  values  of  human  bodies,  that  sets  a  limit 
to  industrial  growth  or  to  the  possible  annual  production. 
The  efficiency  of  machinery,  or  what  is  known  as  the 
economy  realized  through  the  use  of  machinery,  rests  at 
any  time  on  the  extent  to  which  the  intelligence  of  man 
has  succeeded  in  controlHng  the  forces  of  nature.  What 
is  called  a  labor-saving  machine  is  merely  a  method  or 
device  by  which  some  power  of  nature  is  forced  to  do 
what  before  was  done  by  the  expenditure  of  human  power, 
or  to  increase  the  efficiency  of  human  power,  or  to  do 
what  human  power  is  incapable  of  doing.  In  this  fact, 
that  is  to  say,  (the  substitution  of  the  power  of  nature 
for  human  power)  do  we  find  the  secret  of  modern  indus- 
trial efficiency.  This  means  the  same  thing  as  the  sub- 
stitution of  machinery  for  tools. 

(b)  The  Changed  Point  of  View. — The  beginning  of 
the  changes  which  have  resulted  in  the  substitution  of 
machinery  for  tools  appeared  in  England  about  1760. 
This  date  is  significant  because  it  marks  a  change  in  the 
way  people  thought  about  industry.  Prior  to  1760  the 
idea  of  invention  as  a  means  of  multiplying  the  efficiency 
of  work,  was  not  an  effective  idea.    It  did  not  present  it- 


88  DESCRIPTION  OF  INDUSTRY 

self  to  workers  as  a  means  either  of  lightening  their  work 
or  of  increasing  their  output.  By  1820  or  1830,  however, 
the  importance  of  invention  was  fully  recognized  and  the 
genius  of  invention  was  heartily  encouraged.  The  busi- 
ness world  of  to-day  is  what  it  is,  very  largely,  because 
of  this  change  in  the  point  of  view  from  which  workers 
regarded  industry. 

It  is  diflScult  for  us,  who  accept  the  blast  furnace  and 
the  aeroplane  as  somewhat  ordinary  and  common  place 
achievements,  to  understand  the  state  of  mind  in  which 
men  were  content  to  rely  almost  exclusively  on  human 
power.  Such,  however,  was  the  fact.  In  the  textile 
industry,  for  example,  but  two  changes,  in  the  method 
Df  doing  work  had  been  made  between  the  time  of  the 
Greek  civilization  and  the  latter  part  of  the  18th  cen- 
tury. Penelope,  who  worked  at  her  loom  while  awaiting 
the  return  of  Ulysses,  would  have  found  nothing  very 
strange  in  the  art  of  weaving,  could  she  have  made  a  visit 
to  the  home  of  a  textile  worker  in  the  beginning  of  the 
reign  of  George  III.  The  spinning  wheeLhad  taken  the 
place  of  the  dista£F,  and  a  rough  contrivance  like  a  water 
wheel,  had  come  into  use  for  fulling  cloth.  Outside  of 
these  two  inventions,  the  process  of  carding,  spinning, 
dyeing,  weaving,  and  finishing  the  cloth  was  in  England, 
in  1760,  what  it  had  been  the  world  over,  time  out  of 
mind.  The  life  of  the  people,  their  social  conditions, 
their  industrial  organization,  and  their  market  relations, 
were  adjusted  to  what  was  called  the  "Doniestic_S;^tem 
of  Industry";  that  is  to  say,  to  hand  work  carried  on  in 
tneTiomes~of  the  workers. 

§  24.  Steps  in  the  Development  of  Machine  Industry. 
—In  1760  it  was  the  custom  for  an  English  weaver  to 


MACHINERY  IN  INDUSTRY  89 

own  or  rent  a  small  piece  of  land  and  to  divide  his  time 
between  its  cultivation  and  work  at  his  trade.  The 
women  and  other  members  of  the  family  were  accus- 
tomed to  spin  the  yarn  of  which  the  weaver  would  make 
cloth  at  a  hand  loom  set  up  in  his  cottage.  The  first  tex- 
tile invention,  of  a  long  series  of  inventions  that  followed, 
was  the  invention  of  the  spinning  jenny,  by  Hfl.rpfrq.yea 
in  1765.  This  was  a  contrivance  by  which  the  spinner 
could  spin  a  dozen  or  more  threads  at  once.  It  was  used 
secretly  for  some  time  and  was  not  patented  until  1770. 
About  the  same  time  Arkwright  invented  what  was 
known  as  the  water  frame,  the  chief  significance  of  which 
was  that  it  was  designed  to  be  worked  by  water  power. 
One  reason  for  the  tardy  use  of  these  new  contrivances 
was  the  fact  that  the  threads  they  made  were  not  hard 
enough  or  smooth  enough  to  be  used  in  the  weaving  of 
fine  cloth.  This  was  finally  overcome  by  the  invention 
of  roller  spinning.  There  is  some  doubt  whether  Ark- 
wright or  Wyatt  was  the  inventor  of  the  "spinning  en- 
gine without  hands,"  as  it  was  called,  but  for  our  pur- 
pose this  is  not  important.  In  1779.  Crompton  invented,, 
"the  mule,"  so  called,  because  it  was  a  hybrid  machine. 
It  combined  the  elements  of  the  jenny  and  the  water 
frame,  and  produced  a  thread  that  was  at  once  fine  and 
strong.  "The  result  of  these  three  inventions  was  the 
definite  conquest  of  the  spinning  industry  by  the  fac- 
tory," although  the  perfection  of  these  devices  was  not 
brought  into  general  use  until  1825. 

These  inventions,  although  of  great  importance,  would 
not,  of  themselves,  have  changed  the  course  of  the  in- 
dustrial world.  They  do  not  show,  at  least  in  a  clear 
manner,  a  conscious  purpose  to  save  labor  by  the  use  of 


90  DESCRIPTION  OF  INDUSTRY 

machinery  and  by  the  application  of  scientific  knowledge 
to  business  ends.  This  changed  point  of  view  may  be 
illustrated  by  three  events  which  will  now  be  mentioned. 
(The  use  of  spinning  machinery  gave  to  the  hand  weav- 
ers more  yarn  than  they  could  readily  use.  There  was 
thus  an  industrial  demand  for  the  invention  of  a  power 
loom.\  As  the  story  goes,  the  necessity  of  such  an  inven- 
tion was  the  subject  of  conversation  at  a  dinner  at  which 
a  clergyman  named  Cartwright  was  present.  He  under- 
took to  produce  a  machine  for  using  power  in  the  weav- 
ing of  cloth.  The  success  of  Cartwright  in  the  inven- 
(X  tion  of  the  power  loom  is  the  first  significant  case  in  which 
a  clearly  recognized  need  of  a  machine  was  the  occasion 
for  its  invention.  This  invention,  together  with  the 
three  inventions  mentioned  in  the  foregoing  paragraph, 
revolutionized  the  textile  industry  and  laid  the  founda- 
tion of  England's  superiority  in  the  production  of  cotton 
and  woolen  goods. 

Another  step  in  the  transformation  of  industry  per- 
tains to  the  control  of  power.  The  water  frame  was  de- 
signed to  make  use  of  water  power  in  spinning,  but  the 
inadequacy  of  this  form  of  power  for  all  kinds  of  industry 
was  quickly  recognized,  /in  1785,  Bolton  and  Watt  made 
a  steam  engine  for  use  in  a  cotton  mill  land  the  success  of 
this  appliance  gradually  extended  the  ilse  of  steam  engines 
to  all  kinds  of  manufacturing  in  which  machinery  had 
been  substituted  for  tools.  The  fact  that  heat  could  be 
converted  into  motion  by  the  medium  of  steam  had  been 
known  for  many  years.  A  crude  contrivance  called  a 
steam  engine  was  used  for  pumping  water  out  of  mines 
before  1760,  but  the  development  of  this  mechanism  so 
as  to  adapt  it  to  the  use  of  the  factory,  required  years  of 


MACHINERY  IN  INDUSTRY  91 

application  and  the  expenditure  of  considerable  capital. 
This  perfection  of  the  steain_engine,  so  as  to  make  it 
commercially  available,  is  a  second  illustration  of  the  fact 
that  the  recognition  of  a  demand  for  a  mechanical  con- 
trivance leads  to  the  construction  of  that  contrivance. 
In  this  case,  especially,  the  desire  to  bring  a  force  of 
nature  to  do  the  work  heretofore  done  by  human  power, 
was  the  stimulus  to  the  invention.  The  invention  of  the 
steam  engine  supplied  for  machinery  an  almost  unUmited 
amount  of  power,  and  this,  in  turn,  made  possible  an 
expansion  for  production  of  which  no  one  before  had 
dreamed. 

The  power  made  available  by  the  steam  engine  is 
generated  through  the  combustion  of  coal.  The  mining 
of  coal  was  dangerous  on  account  of  the  fire-damp  in  the 
mines.  For  nearly  a  generation  the  development  of 
machine  industry  was  retarded  by  the  danger  incident  to 
the  mining  of  coal.  In  1815,  Sir  Humphry  Davy  devised 
a  lamp  which  the  miner  might  carry  with  safety.  This 
reduced  the  cost  of  mining  coal,  and  provides  us  with  a 
third  illustration  of  the  change  in  the  point  of  view  from 
which  the  industrial  world  had  come  to  be  regarded.  The 
laboratory  of  the  foremost  scientist  of  the  century  was 
used  to  forward  the  development  of  industry.  Another 
incident  of  the  same  sort  is  found  in  the  development  of 
chemical  bleaching.  Sufficient,  however,  has  been  said 
to  make  it  clear  that  by  1825  the  outlook  upon  the  busi- 
ness world  had  been  entirely  changed  from  what  it  was 
in  1760.  The  development  of  industry  was  no  longer 
limited  by  the  amount  of  human  power  available  for  work. 
On  the  contrary,  the  only  boundary  that  can  now  be  as- 
signed to  the  outswing  of  industry  is  the  growth  of 


JL 


92  DESCRIPTION  OF  INDUSTRY 

scientific  knowledge  that  can  be  applied  to  commercial 
ends.  When  the  genius  for  invention  is  exhausted,  the 
story  of  the  development  of  our  business  world  will  have 
been  told. 

§  25.  The  Development  of  Steam  Transportation.^ 
The  spirit  of  invention  has  shown  itself  in  many  lines 
other  than  that  of  the  textile  industry,  but  these  need  not 
here  be  narrated.  All  teach  the  same  lesson.  There  is, 
however,  one  way  in  which  power  has  been  applied  to 
industry  of  sufficient  importance  to  deserve  special 
notice.  In  order  to  produce  goods  cheaply  by  machinery, 
they  must  be  produced  in  considerable  quantities,  from 
which  it  follows  that  a  restricted  market  will  of  itself 
limit  the  benefits  that  may  result  from  the  use  of  ma- 
chinery in  production.  There  is  thus  raised  a  demand  for 
cheap  transportation  as  well  as  for  cheap  production,  a 
demand  which  was  met  by  the  development  of  steam 
railways  for  inland  transportation  and  of  steamships  for 
water  transportation. 

The  importance  of  improved  means  of  transportation 
was  recognized  in  England  in  the  18th  century.  The 
names  of  Telford  and  Macadam  stand  high  as  engineers 
who  devoted  their  hves  to  the  construction  of  roadways. 
We  still  have  macadamized  roads.  The  Duke  of  Bridge- 
water  built  a  canal  for  the  transportation  of  coal  in  1758. 
Thus  in  the  latter  half  of  the  18th  century  the  close  con-, 
nection  between  production  and  transportation  was 
recognized. 

The  significant  development  of  transportation,  how- 
ever, awaited  the  perfection  of  the  steam  locomotive. 
The  name  of  Robert^  Stephenson  will  forever  be  remem- 
bered as  the  inventor  of  the  locomotive,  that  is  to  say, 


MACHINERY  IN  INDUSTRY  9S 

an  engine  propelled  by  steam,  capable  of  drawing  cars 
over  iron  rails.  The  year  1830  may  be  accepted  as  the 
date  which  marks  the  beginning  of  the  era  of  transporta- 
tion by  rail.  For  twenty  years  the  claims  of  canals  as 
means  of  transportation  were  strongly  urged  by  engineers, 
but  by  1850,  in  the  United  States  at  least,  the  business 
intelligence  of  the  country  was  fully  converted  to  the 
use  of  railways.  The  application  of  steam  power  to  water 
transportation,  which  began  with  Robert  Fulton,  was 
also  developed  during  this  period. 

It  is  not  possible  for  one  who  writes  the  history  of  the 
business  world  in  the  19th  century  to  overstate  the  im- 
portance of  railways,  but  a  comparison  taken  from  the 
history  of  our  own  country,  will  suggest  the  industrial 
significance  of  steam  transportation  in  a  very  graphic 
manner.  In  1845,  the  Secretary  of  the  Treasury  desired 
to  learn  something  about  the  manufacturing  industry  in 
Che  United  States,  and  among  other  things  he  learned  that 
manufacturers  were  not  able  to  sell  their  goods  more 
than  about  two  hundred  miles  from  the  place  where  they 
were  made.  This,  of  course,  means  that  machinery  could 
not  be  used  to  its  full  capacity  for  production;  to  do  so, 
would  be  to  produce  more  goods  than  could  be  sold  in  a 
small  market  of  four  hundred  miles  in  diameter. 

Such  a  situation  is  almost  unthinkable  as  compared 
with  that  of  the  present  time.  Shoes  made  in  Massachu- 
setts are  sold  in  Texas.  Oranges  raised  in  California 
appear  on  the  breakfast  table  of  a  citizen  of  Maine.  Hay 
raised  in  Michigan  goes  to  Arkansas,  Maryland,  and 
Connecticut.  Peaches  raised  in  Georgia  will  be  eaten  in 
Wisconsin.  There  is  no  such  thing  in  this  country  at 
the  present  time  as  a  localized  market,  all  of  which  is  due 


94  DESCRIPTION  OF  INDUSTRY 

to  the  wonderful  development  of  railways  and  steam 
transportation. 

Perhaps  enough  has  been  said  respecting  the  formal 
part  of  the  industrial  revolution.  That  the  changes 
described  are  revolutionary  in  character  must  be  ad- 
mitted, when  the  outlook  upon  the  modern  business  world 
is  compared  with  that  of  the  18th  century.  In  the  changes 
here  recited,  is  found  the  explanation  of  modern  wealth, 
of  national  power,  and  of  the  high  standard  of  material 
well-being.  Nor  is  there  any  reason  to  expect  that  further 
progress  will  be  arrested.  The  genius  for  invention  shows 
no  mark  of  exhaustion.  The  boundary  set  to  the  possible 
development  of  industry  is  no  longer  the  available  amount 
of  human  power  applied  to  hand  work.  A  new  power 
has  been  geared  to  the  shaft  of  industry  whose  strength 
has  not  yet  been  measured.  This  is  the  chief  lesson 
which  a  study  of  the  industrial  revolution  teaches. 

§  26.  Measurement  of  Increased  EflBlciency. — It  is 
sometimes  easy  to  say  a  thing  without  really  grasping 
its  significance.  So  familiar  is  the  industrial  use  of  power, 
that  we  are  in  some  danger  of  losing  the  point  of  our 
lesson.  It  may,  therefore,  be  well  to  submit  an  estimate 
designed  to  show  in  a  graphic  manner  the  eflSciency  that 
comes  with  the  industrial  use  of  power. 

Since  the  significance  of  machinery  consists  in  the 
substitution  of  Nature's  powers  for  the  muscular  force 
of  man,  and  since  the  consumption  of  coal  in  the  boiler 
of  a  steam  engine  is  the  chief  means  of  effecting  that 
substitution,  it  follows  that  the  labor  required  to  mine 
coal,  as  compared  with  the  power  for  work  that  lies  in 
the  coal  mined,  will  show  how  much  the  industrial  world 
has  gained  by  doing  work  in  this  roundabout  way. 


MACHINERY  IN  INDUSTRY  95 

The  latent  energy  in  a  pound  of  average  coal  is  some- 
thing like  12,600  heat  units.  This  pound  of  coal,  if  burned 
in  an  engine  of  fair  efficiency,  delivers  for  work  an  amount 
of  energy  equal  to  982,000  foot-pounds.  If  now,  a  coal 
miner  is  able  to  mine  two  tons  of  coal  a  day,  he  gives 
to  industry,  as  the  result  of  eight  hours  work,  an  amount 
of  available  energy  equal  to  4,480  times  982,000,  or  4,390,- 
000,000  foot-pounds.  This  figure  must  be  compared  with 
the  energy,  measured  in  foot-pounds,  which  our  miner 
could  give  in  a  day  if  he  applied  his  muscular  power 
directly  to  the  production  of  those  things  that  are  now 
produced  by  the  machinery,  driven  by  the  engine,  fed 
by  the  coal  which,  as  a  miner,  he  has  dug. 

For  this  comparison  we  accept  the  engineers'  formula 
that  one  horse  power  is  equal  to  33,000  foot-pounds  and 
that  a  man  power  is  one-twelfth  a  horse  power.  From 
this  it  follows  that  the  standard  measurement  of  a  man 
power  is  2,750  foot-pounds.  It  should  next  be  noticed 
that  the  horse  power  unit  is  confined  to  one  minute  of 
work.  It  means  the  amount  of  energy  it  would  take  to 
raise  one  pound,  one  foot,  in  one  minute.  The  figure 
given  above  for  the  coal  dug  by  the  miner  is  the  result 
of  eight  hours  work,  from  which  it  follows  that  the  2,750 
foot-pounds,  which  means  the  standard  energy  that  a  man 
can  deliver  in  one  minute,  must  be  multiplied  by  480  in 
order  to  find  the  amount  of  energy  delivered  in  an  eight- 
hour  day.  The  multiplication  shows  this  to  be  1,320,000 
foot-pounds. 

We  have  now  the  two  figures  to  be  compared.  If  a 
miner  of  coal  works  eight  hours  a  day  and  produces 
two  tons  of  coal,  he  creates  available  power  of  4,390,000,- 
000  foot-pounds :  in  doing  this  work  he  expends  muscular 


96  DESCRIPTION  OF  INDUSTRY 

energy  to  the  amount  of  1,320,000  foot-pounds.  The 
net  gain  to  industry  in  available  power  is  the  differ- 
ence between  these  two  figures.  The  efficiency  of 
this  worker,  due  to  machinery,  is  increased  more  than 
3^0  fold.  Three  thousand  times  as  much  working 
power  gets  into  work  as  was  the  case  when  man  used 
tools. 

The  above  analysis  is,  perhaps,  more  graphic  than 
accurate.  It  takes  no  account  of  sorting,  transporting  and 
otherwise  handling  coal  in  order  to  make  it  available  for 
factory  purposes,  nor  the  loss  in  power  if  used  far  from  the 
place  it  is  generated;  but  the  comparison  is  sufficiently 
accurate  to  support  the  lesson  taught.  We  find  in  the 
extended  use  of  power  machinery  the  key  to  the  secret 
of  that  marvelous  increase  in  producing  ability  dis- 
played by  the  modern  business  world.  The  world 
is  growing  rich,  because,  by  the  means  of  machinery, 
nature  is  made  to  work.  But  nature  asks  no  pay 
and  the  pay  of  man  is  on  that  account  increased  many 
fold. 

/Work  is  also  made  effective  by  removing  the  obstruc- 
tion to  the  free  use  of  power.  )  The  steel  rail  over  which  a 
locomotive  draws  a  heavy  train  of  cars  is  an  illustration. 
Some  idea  of  the  extent  to  which  the  scientific  application 
of  power  adds  to  its  productive  ability  may  be  learned 
from  an  experiment  recorded  by  Babbage,  in  his  remark- 
able book,  "Economy  of  Manufacture."  The  experiment 
refers  to  the  force  necessa^g^to  move  a  block  of  stone, 
which,  he  says,  "will  vary  according  to  the  mechanical 
knowledge  employed  in  their  transport.  From  this 
experiment  it  results,  that  the  force  necessary  to  move  a 
stone  along: — 


MACHINERY  IN  INDUSTRY  97 

Part  of  its  weight 

1.  The  roughly  chiseled  floor  of  its  quaxry  is 2/3 

2.  Along  a  wooden  floor 3/5 

3.  By  wood  upon  wood 5/9 

4.  If  the  wooden  surfaces  are  soaped 1/6 

5.  With  rollers  on  the  floor  of  the  quarry l/32 

6.  On  rollers  on  wood 1/40 

7.  On  rollers  between  wood .- 1/50" 

A  comparison  of  the  various  methods  used  in  moving 
the  stone,  shows  the  saving  of  power  that  results  from 
the  application  of  mechanical  principles. 

As  Mr.  Babbage  observes,  "At  each  increase  of  knowl- 
edge, as  well  as  of  the  contrivance  of  every  new  tool, 
human  labor  becomes  abridged.  The  man  who  contrived 
rollers  invented  a  tool  by  which  his  power  was  quintripled. 
The  workman  who  first  suggested  the  employment  of 
soap  or  grease  was  immediately  enabled  to  move,  without 
exerting  a  greater  effort,  more  than  three  tunes  the  weight 
he  could  before." 

Some  years  ago  a  computation  was  made,  designed  to 
show  the  increased  efficiency  of  machine  work  as  com- 
pared with  tool  work.  The  result  of  this  computation, 
applied  to  the  present  day  population  of  the  United  States 
is,  that  it  would  take  426,000,000  people  to  produce  with 
tools  what  1^,000,000 j)eople  now  produce  with  machin- 
ery. This  computation,  it  should  be  said,  rests  on  an 
investigation  of  the  mechanical  trades.  It  takes  no 
account  of  the  increased  numbers  required  to  provide 
food  for  the  increased  number  of  mechanical  and  man- 
ufacturing workers.  The  figures  are  not  altogether 
trustworthy,  but  the  impression  which  they  leave  is  a 
true  impression.  They  give  something  of  a  measurement 
of  the  tremendous  increase  in  industrial  power  due  to  the 
substitution  of  machinery  for  tools. 


98  DESCRIPTION  OF  INDUSTRY 

§  27.  Some  Results  of  the  Industrial  Revolution.— 

The  substitution  of  machinery  for  tools  has  brought  with 
it  quite  a  number  of  social  and  industrial  results  which 
must  be  known  by  one  who  desires  to  understand  our 
modern  business  world.    Three  of  them  will  be  named. 

(a)  Redassi^cation  of  Sodetv. — ^The  development  of 
that  business  organization  necessary  for  the  employment 
of  large  amounts  of  capital,  is  responsible  for  the  appear- 
ance of  both  the  *' capitalist  class"  and  the  "labor_class." 
as  those  words  are  now  used  by  business  men.  This  does 
not  mean  that  there  was  no  capital  and  no  labor  prior 
to  the  substitution  of  machinery  for  tools;  but  that  the 
conditions  under  which  capital  was  used  and  laborers  em- 
ployed prior  to  1760,  were  different  from  their  use  and  em- 
ployment in  the  modern  business  world.  This  may  be 
best  illustrated  by  reference  to  the  textile  workers.  The 
textile  industry  prior  to  1760,  was  carried  on  under  what 
is  known  as  the  "domestic  system."  According  to  this 
system  the  workman  owned  or  rented  his  home;  he  owned 
or  contracted  for  the  material  upon  which  he  worked; 
he  owned  the  tools  with  which  he  worked;  he  sold  the 
product  of  his  work;  and  he  accepted  the  proceeds  of 
such  sale  as  his  wages. 

A  complete  description  of  the  industrial  conditions  as 
they  existed  in  England  in  the  18th  century,  would  mod- 
ify somewhat  this  concise  description.  There  are  a  few 
illustrations  of  what  we  may  call  the  modem  factory; 
that  is  to  say,  the  assembling  of  workmen  under  the 
roof  of  an  employer.  By  the  middle  of  the  18th  century, 
also,  there  had  grown  up  in  England  a  middle  naan  whose 
specialized  business  it  was  to  furnish  weavers  with  yam 
and  pay  them  for  cloth.    Speaking  generally,  however, 


MACHINERY  IN  INDUSTRY  09 

and  holding  in  mind  the  purpose  for  which  the  descrip- 
tion in  the  text  is  made,  it  may  be  accepted  as  conveying 
a  true  picture  of  working  conditions  prior  to  the  industrial 
revolution. 

If  now,  we  consider  industrial  organization,  after  the 
transition  to  the  factory  system  had  been  accomplished, 
we  find  a  number  of  interesting  facts. 

First:  The  laborer  had  been  separated  from  the  soil. 
He  had  come  to  be  a  dweller  in  the  city  where  the  ma- 
chinery was  situated,  and  lived  under  city  rather  than 
rural  conditions. 

Second:  The  home,  or  cottage,  or  tenement  of  the 
laborer,  no  longer  sheltered  the  unplements  or  tools 
used  in  work.  These  had  given  way  to  machinery  driven 
by  water  power  or  steam  power,  and  were  set  up  per- 
manently in  j^uilding  known  as  the  factory.  _  This  was 
necessary,  for  not  only  was  the  machinery  too  large  to 
be  set  up  in  the  home  of  the  worker,  but,  in  the  case 
of  the  steam  engine,  the  power  had  to  be  used  close  to 
the  spot  where  it  was  generated. 

Third:  These  machines  came  to  be  the  property  of 
those  who  first  caught  on  to  the  idea  that  production  by 
machinery  had  a  great  future.  They  assumed  the  risk, 
they  were  successful,  and  the  property  in  all  mechanical 
helps  to  workers  came  into  their  hands.  There  was  no 
other  feasible  method,  at  the  time,  of  bringing  the  laborers 
and  the  machinery  together.  The  result  was  that  the 
value  of  the  tools  which  the  laborers  owned  was  destroyed 
because  there  was  no  longer  any  extensive  use  for  tools 
in  production.  The  laborers  were,  in  consequence, 
obliged  to  come  to  the  owners  of  the  machines  to  seek 
for  an  opportunity  to  work.    It  thus  came  about  that  the 


100  DESCRIPTION  OF  INDUSTRY 

change  from  tools  to  machines  made  of  the  old  laborers 
so  far  as  industry  is  concerned,  a  propertyless__wage- 
eaming  class. 

The  converse  is  true  of  the  class  we  now  call  the  cap- 
italist class.  Somebody  had  to  own  the  machines  and 
assume  the  risks.  Somebody  had  to  employ  labor  if  the 
factory  system  with  machinery  was  to  prove  a  success. 
These  small  capitalist  employers,  having  reaped  the  in- 
creased profit  resulting  from  the  first  substitution  of  ma- 
chinery for  tools,  came  to  be  the  large  capitalist  employers 
of  to-day.  They  grew  into  a  capitalist  class  as  naturally 
as  laborers  grew  into  a  wage-earning  class.  This  re- 
classification of  society  on  industrial  lines  is  the  most  far 
reaching  result  of  the  industrial  revolution. 

(b)  Corporate  Organization  of  Business. — The  profit- 
able use  of  machinery  calls  for  large  amounts  of  capital 
under  the  direction  of  a  single  management.  It  means  the 
growth  of  "great  industries"  and  makes  necessary  some 
kind  of  an  organization  by  which  great  industries  can  be 
held  together  and  controlled.  The  type  of  organization 
most  successful  for  this  purpose  is  the  corporation.  Its 
cursory  description  is  necessary  in  a  treatise  that  under- 
takes to  draw  a  picture  of  the  modern  business  world. 
This  description  will  be  found  in  Chapter  XIII  of  this 
treatise.  It  will  there  be  shown  why  the  corporation  is 
the  business  organization  peculiarly  adapted  to  the  needs 
of  great  industries  that  rely  on  machinery.  One  of  the 
most  stupendous  facts  of  our  time  is  the  development  and 
the  insidious  influence  of  corporations.  It  is  a  result  of 
the  industrial  revolution. 

(c)  Organization  of  Wage-earners. — Another  fact  of 
great  significance  is  the  organization  of  the  labor  interest, 


MACHINERY  IN  INDUSTRY  101 

that  is  to  say,  the  rise  and  growth  of  trade  unions,  trade 
federations,  and  the  Uke.  /A  trade  union  is  an  organiza- 
tion of  workmen  in  a  given  trade,  to  the  end  that  they  may 
act  as  a  unit,  rather  than  as  individuals.y  The  engineers 
that  work  on  the  railways,  for  example,  band  together  and 
agree  to  bargain  for  wages  in  a  body.  They  make  what  is 
called  a  coljectivebargain  for  wages.  By  this  means,  wage- 
earners  believe  they  are  able  to  get  more  for  their  work 
than  they  would  get  if  each  struck  a  bargain  for  himself. 

Before  the  industrial  revolution,  there  were  no  trade 
unions  in  the  sense  in  which  that  word  is  now  used;  at 
present  a  large  part  of  workers  in  trades,  and  in  some 
countries  agricultural  workers  and  clerks,  are  members 
of  some  kind  of  labor  organization.  It  is  sufficient  for 
the  present  to  see  that  the  organization  of  labor,  Uke  the 
organization  of  capital,  may  be  traced  to  the  changes 
that  came  over  industrial  society  when  hand  work  was 
displaced  by  machine  work.  How  to  treat  trade  unions 
is  one  of  the  most  perplexing  questions  of  modern  times. 
The  destiny  of  the  industrial  world  depends  upon  the 
answer  given. 


CHAPTER  VI 
MOTIVE  IN  INDUSTRY 

"Desires  extend  themselves  with  the  means  of  their  gratification; 
the  horizon  is  enlarged  in  proportion  as  we  advance;  each  new  want, 
equally  accompanied  by  its  pleasure  and  its  pain,  becomes  a  new 
principle  of  action." — Bentham. 

In  explaining  property  and  the  need  of  private  property 
it  was  said,  that  men  will  not  undertake  severe  work  unless 
they  are  fairly  sure  of  being  paid  for  their  work  or  of  mak- 
ing a  profit  out  of  their  industry.  This  means  that  men 
will  not  work  without  a  motive.  If  we  desire  to  find  the 
cause  of  work  we  must  discover  the  force  or  motive  that 
sets  it  in  operation.  As  Nature's  forces  are  the  power  that 
makes  machinery  effective,  so  motive  in  industry  is  the 
force  that  lies  back  of  work.  It  is  our  purpose  in  the  pres- 
ent chapter  to  describe  and  classify  industrial  motives, 
and  to  consider  the  various  ways  in  which  industrial  mo- 
tives are  presented  to  men  in  order  to  induce  them  to  work. 

§  28.  Wants  as  Motives  to  Work. — The  most  impor- 
tant fact  in  explaining  industry  is  the  fact  that  men  have 
many  and  varied  wantSj.  To  satisfy  wants  is  the  purpose  of 
work  and  the  explanation  of  industry.  This  statement 
may  be  proven  by  assuming  the  contrary.  If  the  wants 
of  men  could  be  supplied  without  work,  there  would  be  no 
farming,  no  manufacturing,  no  buying  and  selling,  no 
paying  or  receiving  of  wages,  no  anything  as  we  now  know 
it  in  the  world  of  industry.  Indeed,  one  cannot  imagine 
what  kind  of  a  world  it  would  be  if  ever5d;hing  men  desire 
were  as  free  as  the  air.    This  fact  that  work  is  set  going 

102 


MOTIVE  IN  INDUSTRY  103 

by  the  desire  to  gain  possession  of  the  things  that  Nature 
does  not  freely  give,  is  fundamental  in  every  attempt  to 
explain  the  industrial  world.  We  have  here  a  cause,  a 
means,  and  a  result.  The  cause  is  human  wants;  the 
means  is  human  work;  and  the  result  is  human  satisfac- 
tion. What  work  is  we  have  already  learned  from  the 
first  chapter;  we  must  now  consider  the  nature  of  wants 
and  the  conditions  under  which  wants  are  satisfied,  and 
learn  what  influence  the  consumption  of  those  things  that 
are  produced  by  work  may  have  upon  the  extent  to  which 
and  the  manner  in  which  men  work. 

(a)  Analysis  of  Wants. — An  economic  want  is  not  the 
lazy  wish  to  have  something.  A  boy  lies  in  the  shade 
and,  in  a  dreamy  sort  of  way,  wishes  that  he  had  a  motor- 
cycle. But  that  does  no  good;  it  puts  no  money  in  his 
pocket.  The  wish  leads  to  no  definite  purpose  on  his  part 
and,  consequently,  no  result  follows.  But  if  the  boy's 
wish  for  the  motorcycle  is  so  great  that  he  is  willing  to 
mow  the  lawn  to  get  the  money,  or  to  give  up  ice  cream 
sodas  to  save  the  money,  then  his  wish  is  what  political 
economists  call  an  effective  economic  want.  (^An  economic 
want,  then,  in  the  sense  in  which  we  shall  use  the  word, 
may  be  defined  as  a  desire  combined  with  the  purpose  of 
securing  the  means  of  satisfying  that  desire.'^  It  is  the 
cause  of  work. 

The  different  kinds  of  wants  are  so  many  that  they 
cannot  be  numbered.  They  are  as  various  as  human 
nature.  The  usual  classification  of  wants  places  them  imder 
three  general  heads,  as  follows: 

Wants  of  the  necessaries  of  life. 

Wants  of  the  comforts  of  life,  and  ; 

Wants  pf  the  luxuries  of  life. 


104  DESCRIPTION  OF  INDUSTRY 

The  general  idea  underlying  this  classification  is  that 
necessaries  comprise  those  things  that  sustain  life,  such  as 
food,  shelter,  _and  clothing.  The  comforts  of  Ufe  include 
perhaps  the  same  kinds  of  goods,  but  made  up  in  such  a 
way  as  to  give  rise  to  an  added  pleasure  beyond  the  pleas- 
ure that  comes  with  the  bare  satisfaction  of  physical  or 
animal  wants.  Thus,  food  well  served,  a  house  well  ar- 
ranged and  well  furnished,  clothes  that  fit  and  are  of  good 
color  and  material,  are  illustrations  of  this  class  of  goods. 
They  are  desired  because  their  use  makes  us  feel  rested, 
contented,  and  respectable.  In  short,  they  minister  to 
what  one  calls  the  comforts  or  class  requirements  of  life. 
Luxuries  cannot  be  defined  except  from  the  point  of  view 
ofjona^^particulaxjclass^i^so^  If,  however,  we  hold 
in  mind  how  the  majority  of  people  live,  all  things  that 
supply  wants  other  than  those  of  physical  or  ordinary 
comforts  are  usually  regarded  as  luxuries.  Thus,  the 
desire  for  pictures,  for  music,  for  the  theater,  for  jewels 
or  costly  pleasures,  and  the  Hke,  is  a  desire  for  luxuries. 
All  these  wants  and  desires,  provided  they  are  sufficiently 
strong  to  induce  men  to  work  in  order  to  obtain  their  satis- 
faction, must  be  accounted  as  motives  in  industry. 
(Jt  is  sometimes  said  that  the  want  for  things  bad  is 
not  an  economic  want.^  For  example,  is  the  desire  for 
liquor,  for  dancing  until  three  o'clock  in  the  morning,  or 
for  high-heeled  shoes  that  break  the  arch  of  the  foot,  an 
economic  want?  The  answer  to  this  question  is  that, 
from  the  point  of  view  of  the  business  world,  these  desires 
are  no  different  from  the  desire  for  food,  for  shelter,  for 
pictures,  or  for  any  other  of  those  desires  which  by  com- 
mon consent  are  regarded  as  healthy  desires.  Provided 
a  want  is  sufficiently  strong  to  induce  men  to  work  to 


MOTIVE  IN  INDUSTRY  105 

secure  its  satisfaction,  it  is,  from  the  point  of  view  of  the 
business  world,  an  economic  want.  A  social  reformer  may 
properly  undertake  to  educate  people  to  a  better  appre- 
ciation of  what  their  healthy  desires  should  be,  but  he 
has  no  right  to  pervert  language  and  to  say  that  a  perni- 
cious desire,  if  sufficiently  strong  to  induce  men  to  work, 
is  not  an  economic  want. 

(b)  The  Law  of  Wants. — ^The  pertinent  fact  about 
wants  is  that  they  grow.  They  seem  to  be  capable  of  in-_ 
definite  expansion.  The  satisfaction  of  one  grade  of 
wants  permits  other  wants  to  spring  up.  What  was  a 
luxury  to  one  generation  becomes  a  comfort  to  the  second 
generation,  and  perhaps  a  necessity  to  the  third  genera- 
tion. Many  illustrations  will  at  once  present  themselves 
to  make  clear  the  truth  of  this  statement. 

The  fact  that  wants  are  capable  of  indefinite  expansion 
is  of  great  importance,  for  it  shows  that  there  is  no  end  to 
industrial  progress  so  far  as  motive  for  work  and  effort 
is  concerned.  It  suggests,  also,  the  course  that  industrial 
progress  is  likely  to  take.  Suppose  the  invention  of  a 
labor-saving  machine  enables  seven  men  to  produce  as 
much  of  a  certain  kind  of  goods  as  ten  men  produced 
before.  This  does  not  mean  that  the  three  men  thus 
thrown  out  of  work  will  be  idle.  On  the  contrary,  there 
will  spring  up  in  the  conmiunity  a  demand  for  some  other 
kind  of  goods,  and  these  three  men  will  give  their  work 
to  the  production  of  those  goods  which  satisfy  the  new 
wants.  This  illustration  shows  how  the  growth  of  wants 
is  related  to  industrial  progress. 

Every  want  satisfied  gives  rise  to  a  new  want,  or  per- 
mits an  old  desire  to  become  an  effective  economic  want. " 
Every  step  in  the  increase  of  efficiency  of  workers  sets 


106  DESCRIPTION  OF  INDUSTRY 

some  workers  free  so  far  as  old  wants  are  concerned,  and 
the  need  of  these  freed  workers  to  have  an  income  leads 
them  to  seek  out  new  desires  and  to  produce  goods  which 
will  satisfy  new  wants.  (^  This  fact  that  wants  are  capable 
of  indefinite  growth  is  sometimes  called  the  Law  of  Wants, 
and  as  such  is  the  corner  stone  of  any  theory  of  industrial 
progress.  ) 

§  29.  The  Law  of  Effort^— It  would  be  a  mistake, 
however,  to  think  that  there  is  no  limit  to  the  work  that 
men  will  do.  Quite  as  strong  as  the  desire  for  those  things 
which  work  alone  can  gain,  is  the  desire  for  leisure  and  for 
enjoyment.  When  the  desire  for  leisure  comes  to  be 
stronger  than  the  motive  for  work,  then  work  will  stop 
and  play,  which  as  we  have  already  seen  is  activity  as 
an  end  rather  than  activity  for  an  end,  will  begin.  This 
is  a  very  simple  way  of  putting  one  of  those  imiversal 
facts  of  human  nature  which  makes  our  business  world 
what  it  is.  To  understand  it,  and  to  evolve  from  such 
an  understanding  the  economic  law  of  effort,  it  will  be 
necessary  for  us  to  proceed  a  little  farther  in  our  analysis 
of  wants  and  of  work.    Two  points  will  claim  attention. 

(a)  Fad^  of  Decreasing  Desires. — In  the  first  place  it 
should  be  noted  that  one's  desire  for  a  particular  thing 
decreases  as  the  amount  of  the  thing  which  he  has  in- 
creases, until,  finally,  his  desire  for  any  increased  amount 
of  the  thing  in  question  ceases  altogether.  An  every  day 
illustration  will  make  this  point  clear. 

When  a  man  is  hungry,  there  is  nothing  he  wants  so 
much  as  a  helping  of  bread  and  meat.  He  is  willing  to 
give  a  large  price  for  it  rather  than  suffer  the  pangs  of 
hunger.  After  he  has  eaten  this  first  helping,  he  may 
perhaps  desire  a  second  helping,  but  the  desire  for  this  is 


MOTIVE  IN  INDUSTRY  107 

not  nearly  as  strong  as  was  his  desire  for  bread  and  meat 
before  he  had  eaten  at  all.  He  would  not  pay  as  much  for 
the  second  helping  as  he  would  have  been  willing  to  pay 
for  the  first,  before  the  first  stress  of  hunger  had  been 
satisfied.  But  suppose  he  has  a  second  helping  and  his 
appetite  is  fully  satisfied ;  under  such  conditions,  he  would 
not  accept  a  third  helping  as  a  gift. 

What  is  true  in  this  case  is  universally  true  of  the  rela- 
tion which  exists  between  desire  and  satisfaction.  The 
motive  to  work  is  strongest  when  the  desire  is  most  keen, 
and  this  motive  becomes  weaker  the  more  desire  ap- 
proaches satisfaction.  The  amount  of  effort,  therefore, 
which  one  is  willing  to  put  forth  in  order  to  obtain  those 
things  by  which  wants  are  satisfied,  will  tend  to  decrease 
as  the  amount  of  those  things  through  which  satisfaction 
is  to  be  obtained  increases,  and,  after  a  certain  point, 
unless  there  is  some  other  motive  for  work  than  the 
satisfaction  of  particular  desires,  no  more  work  will  be 
done. 

(b)  Fad  of  Increasing  Fatiqm^ — In  the  second  place, 
it  should  be  noted  that  one's  disinclination  to  work  be- 
comes stronger  the  longer  one  works  without  rest.  It  is 
said  that  work  is  bound  up  with  pain.  While  perhaps 
this  is  the  common  experience  of  most  men  and  women, 
it  is  not  necessarily  true  under  all  conditions.  In  itself, 
work  is  no  more  painful  than  play.  The  idea  that  work 
is  painful  arises  from  the  common  experience  of  workers 
who  push  their  work  beyond  the  stage  of  healthful  en- 
durance. The  motive  for  work  becomes  weaker  with 
every  hour  added  to  the  working  day,  or  every  day  added 
to  the  working  week,  or  every  week  added  to  the  working 
year.    It  appears,  then,  that  from  the  point  of  view  of 


108  DESCRIPTION  OF  INDUSTRY 

work  as  well  as  from  the  point  of  view  of  wants,  there 
comes  a  point  when  work  will  cease. 
,  The  foregoing  is  as  true  of  the  work  of  a  nation  as  of 
that  of  an  individual,  from  which  it  follows  that  a  period 
of  industrial  growth  may  be  brought  to  a  close  by  the 
fact  that  the  mass  of  people  are  satisfied  with  the  stand- 
ard of  living  already  attained;  that  is  to  say,  satisfied 
when  their  desires  are  compared  with  the  increased  work 
that  further  satisfaction  would  entail. 

(c)  Desire  for  Money  an  Exception. — At  this  point, 
some  one  will  certainly  raise  an  objection.  How  is  it  pos- 
sible to  explain  the  fact  that  men  continue  in  the  battle 
of  industry  long  after  they  have  enough  to  satisfy  all  rea- 
sonable wants?  That  this  is  true  of  individuals  every- 
one knows;  it  is  equally  true  of  nations.  The  mass  of 
men  and  women  are  not  content  with  present  attain- 
ments; they  readily  respond  to  leaders  who  assert  that 
this  road  or  that  road  leads  to  industrial  progress.  There 
must  be  something  in  men  which  causes  them  to  under- 
take severe  toil  different  from  the  simple  desire  to  satisfy 
the  necessaries,  the  comforts,  and  the  luxuries  of  life. 
We  must  find  out  what  that  something  is,  if  we  are  to 
explain  our  work-a-day  world. 

Besides  the  desire  for  things  to  be  consumed  or  en- 
joyed, is  the  desire  to  be  rich;  that  is  to  say,  the  desire 
for  money,  and  for  more  money  than  one's  neighbor  pos- 
sesses. The  desire  for  money  differa  from  the  desire  for 
things,  in  that  it  is  never  satisfied.  (The  more  one  has  of 
money,  the  more  one  wants.)  At  least,  a  man  who  does 
not  respond  to  this  desire  for  riches  quickly  drops  out  of 
the  industrial  race,  and  his  influence  for  determining  the 
character  of  the  modem  business  world  may  be  disre- 


MOTIVE  IN  INDUSTRY  109 

garded.  The  desire  for  money  is  a  force  that  strengthens, 
rather  than  weakens,  with  the  attainment  of  the  thing  for 
which  it  strives. 

Since  this  desire  for  money  is  the  strongest  motive  in 
the  modem  business  world,  it  may  be  well  to  study  its 
character  a  little  more  in  detail.  The  fact  that  the  desire 
for  money,  or  the  desire  to  be  rich,  grows  stronger  rather 
than  weaker  with  the  attainment  of  its  end,  may  be  easily 
explained. 

In  the  first  place,  to  become  rich  is  the  badge  of  busi- 
ness  success.  The  desire  for  money  is  merely  a  form  of 
ambition.  To  have  money  makes  a  man  distinguished; 
it  separates  him  from  the  crowd;  he  is  pointed  out  by 
his  neighbors  as  a  successful  man.  One  who  succeeds 
in  business  derives  the  same  kind  of  pleasure  from  his 
success  as  does  a  successful  doctor,  a  successful  lawyer,  a 
successful  politician,  or  a  successful  writer  of  books. 
Moreover,  not  only  does  one  desire  to  succeed  in  any 
task  which  he  has  undertaken,  but  he  desires  to  succeed 
better  than  others  who  are  doing  the  same  thing,  and  thus 
become  a  distinguished  man  in  the  community.  This  is 
what  a  desire  for  riches  means,  and  as  an  industrial 
motive,  it  is  very  powerful. 

In  the  second  place,  it  must  not  be  forgotten  that  the 
possession  of  money  confers  power  on  him  who  possesses 
it.  Whether  we  like  it  or  not,  the  modem  business  world 
is  an  organized  army  of  laborers  over  which  are  captains 
of  industry,  and  the  man  who  is  at  any  time  captain  is 
the  man  who  can  control  money.  This  desire  for  power 
is  common  to  all  men.  The  satisfaction  that  comes  to 
one  because  he  is  in  a  responsible  position,  is  universal. 
The  business  man  feels  this  keenly.    To  succeed  in  busi- 


no  DESCRIPTION  OF  INDUSTRY 

ness  not  only  satisfies  the  ambition  for  success,  but  it  con- 
fers upon  him  who  succeeds  the  satisfaction  that  comes 
with  the  exercise  of  recognized  power. 

Ambition  and  the  desire  for  power  are  perhaps  the 
strongest  passions  that  move  men  to  action.  They  are 
relentless  in  the  demands  which  they  make  upon  men  for 
continued  effort.  By  showing  that  this  passion  is  present 
in  the  business  world,  as  well  as  in  other  walks  of  life, 
we  have  discovered  a  motive  that  will  carry  labor  and 
enterprise  farther  than  the  simple  desire  to  obtain  satis- 
faction of  the  so-called  economic  wants.  With  industrial 
ambition  to  spur  men  on,  there  will  be  no  limit  to  the 
struggle  for  industrial  progress. 

The  lesson  of  the  foregoing  analysis  is  as  follows/ The 
motives  that  lead  men  to  work  are  the  desire  to  satisfy  felt 
wants,  and  the  ambition  to  attain  success  and  to  exercise 
power .\Both  of  these  are  causes  of  work.  They  must  both 
be  included  in  an  explanation  of  industrial  enterprise. 

§  30.  Organization  of  Motives. — A  knowledge  of  the 
nature  of  steam  will  not  of  itself  enable  a  man  to  build  an 
effective  engine.  He  must  know,  also,  the  various  ways 
in  which  steam  may  be  used  in  order  to  get  the  largest 
amount  of  work  out  of  burning  a  certain  amount  of  coal. 
In  the  same  way,  a  knowledge  of  the  nature  of  wants,  and 
of  how  desire  is  related  to  effort,  will  not  permit  one  to 
say  what  particular  kind  of  an  organization  of  workers 
will  be  the  most  efficient.  He  must  know,  also,  the 
different  ways  in  which  work  may  be  organized  and 
select  the  one  which  responds  most  effectively  to  the 
motives  for  work.  This  leads  us  to  the  study  of  the  man- 
ner in  which  industry  is  organized  from  the  point  of  view 
of  the  motivation  of  work. 


MOTIVE  IN  INDUSTRY  111 

(a)  Marks  of  a  Weil-Adjusted  Business. — It  is  easy  to 
state  in  a  sentence  the  marks  of  a  well-adjusted  business, 
so  far  as  this  depends  on  the  manner  in  which  the  motives 
for  doing  work  are  presented  to  the  workers.  A  business 
which  is  organized  on  sound  principles  will  induce  workers 
to  strive, — 

to  produce  the  largest  amount  of  goods  possible, 
to  produce  the  best  quality  of  goods  possible,  and 
to  do  this  with  the  least  possible  expenditure  of  time 
and  of  material. 
The  three  tests  of  efficient  work,  are  quantity,  quali^, 
and  care.     The  larger  the  quantity  produced  the  more 
will  there  be  to  sell;  the  better  the  grade  or  the  quaUty  of 
the  product,  the  higher  will  be  the  price  and  the  larger 
the  gross  receipts  from  sales;  the  greater  the  care  of  the 
workmen  in  the  use  of  time,  material,  and  machinery,  the 
less  will  be  the  expense  of  production  and  the  higher  will 
be  the  net  receipts  that  come  from  sales  of  the  product. 
It  is  the  net  receipts,  the  profit,  the  amount  that  is  left 
over  after  all  costs  of  production  have  been  paid,  that 
determines  future  wages,  future  profits,  and  the  further 
development  of  industry.     It  therefore  follows  that  an 
organization  of  industry  which  brings  all  who  are  en- 
gaged in  a  business,  from  the  foreman  to  the  water-boy, 
to  feel  a  personal  interest  in  quantity,  quaUty,  and  care, 
-is  thg  best  organization. 

It  will  be  instructive  to  ask  how  far  the  modem  business 
world  has  come  towards  the  realization  of  this  ideal.  In 
no  other  way  can  we  gain  so  clear  a  conception  of  the 
practical  bearing  of  motive  on  work. 

(b)  Comparative  Study  of  Motive  in  Industry. — ^The 
industrial  workers  of  the  world  have  beef  organized  in 


112 


DESCRIPTION  OF  INDUSTRY 


many  ways.  To  make  clear  the  point  in  hand,  let  ua 
compare  three  types  of  organization.  These  are:  the 
slaverX-System,  the  wage  system,  which  is  the  one  under 
which  we  are  now  living;  and  a  system  which,  for  want  of 
a  better  name,  may  be  called  the  system  of  co-operation. 
In  order  to  avoid  a  long  statement  in  the  text,  this  com- 
parison will  be  submitted  in  the  form  of  a  diagram,  and 
the  text  will  be  confined  to  explanation  of,  or  conclusions 
from,  this  diagram. 

Comparison  of  Three   Methods   op  Presentinq   Motive  to 

Workers 


Organization 


Status  of 
workman 


Extent  of  work- 
man's interest 
in  work 


Criticism  of 
system 


No  rights 

No  interest  in: 

No  industry 

No  property  in 

quantity, 

of  high  grade 

Slavery  system 

product 
Pay  determined 
by  animal 
wants 

quality,  or 
care 

possible 

Has  political 

No  direct  in- 

High technical 

rights 

terest  in: 

skill  may  be 

No  property  in 

quantity, 

acquired 

Wages  system 

product 

quality,  or 

No  guarantee  of 

Pay  determined 

care 

continuous 

before  work 

or  contented 

is  done 

work 

Has  political 

Has  direct  in- 

Theoretically 

rights 

terest  in: 

the  best 

Co-operative 
system 

Has  property  in 

quantity, 

system  for 

product 

quality,  and 

presenting 

Pay  determined 

care 

motive  to 

after  work  is 

workers 

\ 

1    done 

MOTIVE  IN  INDUSTRY  113 

In  column  1  is  found  the  designation  of  the  working 
organizations  placed  in  comparison.  These  are  the 
Slavery  system,  the  Wages  system,  and  the  Co-operative 
system.  The  word  co-operative  is  not  here  used  as 
many  reformers  use  it.  It  should  not  suggest  to  our 
minds  "co-operative  stores,"  or  "co-operative  factories," 
or  anything  that  stands  for  a  definite  kind  of  contract 
or  business  agreement.  All  of  the  numerous  programs 
of  reorganization  that  have  been  suggested  by  reformers 
during  the  past  one  hundred  years,  from  piece  work  to 
socialism,  are  covered  by  the  phrase  "Co-operative  sys- 
tem," as  here  used. 

In  column  2  will  be  found  a  statement  of  the  legal 
status  of  the  worker  and  of  the  place  he  occupies  in  in- 
dustry. Thus  the  slave  has  no  rights,  for  he  himself  is 
property:  he  does  not  own  or  have  any  claim  upon  the 
product  of  his  hands,  and  the  amount  he  gets  as  the 
result  of  his  work  is  determined  in  the  same  way  as  the 
mule  driver  determines  the  amount  of  corn  to  be  given 
to  his  mule.  Both  are  animals  to  be  kept  in  good  work- 
ing condition  or  their  owner  will  lose  his  profit  from  their 
use. 

The  wage-worker  is  a  freeman.  He  has  a  place  before 
the  law.  In  this  respect  he  differs  from  the  slave  for  he 
cannot  be  forced  to  work  like  a  beast.  Being  a  freeman 
he  can  make  a  contract  for  his  pay  before  he  goes  to  work. 
His  standing  in  industry,  however,  is  far  from  satisfactory. 
He  has  no  property  in  the  things  he  helps  to  make,  and 
he  has  no  interest  in  his  work,  or  motive  to  do  good 
work,  except  to  keep  his  job  at  the  agreed  wages.  What 
is  worse,  especially  for  a  business  world  made  up  of 
freemen,  he  has  no  sense  of  responsibility.    He  assumes 


114  DESCRIPTION  OF  INDUSTRY 

no  risks.  He  has  no  mind  or  thought  for  the  success  of 
the  business  to  which  he  gives  his  time;  at  least,  he  does 
not  think  of  it  in  the  same  way  as  his  employer  thinks  of 
it.  This  is  due  to  the  fact  that  his  pay  is  determined 
before  his  work  is  done. 

The  co-operative  worker,  like  the  wage-worker,  has  a 
place  before  the  law.  He  is  a  freeman  and  can  make  a- 
bargain;  but  the  kind  of  bargain  which  a  co-operative 
worker  would  make,  is  different  from  that  made  by  a 
wage-worker.  It  would  be  such  as  to  give  him  a  place 
in  industry,  and  make  him  feel  a  joint  responsibility  with 
his  co-workers  for  the  success  or  failure  of  the  business 
that  provides  him  work.  His  pay  is  determined  after 
his  work  is  done  and  he  feels  with  regard  to  the  outcome 
just  as  a  proprietor  feels.  There  is,  of  course,  no  such 
organization.  It  cannot  be  found  in  the  business  world 
of  to-day.  It  is  an  ideal,  or  rather  a  plan  here  set  down, 
for  the  purpose  of  showing  that  the  wages  system  fails 
to  present  the  motives  for  work  in  an  effective  manner. 

Columns  3  and  4  in  the  above  diagram  may  be  considered 
together.  The  one  shows  the  extent  of  the  workman's 
interest  in  quantity,  quality,  and  care;  the  other  passes 
judgment  on  the  three  organizations  of  motives  placed 
in  comparison. 

The  slave  has  no  economic  interest  in  his  work.  The 
legal  condition  under  which  he  lives  offers  to  him  no  hope 
for  bettering  his  condition.  It  is  fear  that  forces  him  to 
work  and  fear  is  a  poor  foundation  on  which  to  build  an 
industrial  society.  The  slave  has  no  interest  in  quantity, 
quality,  or  care  of  material,  either  direct  or  indirect. 
History  as  well  as  reason  shows  that  no  industry  of  a  high 
grade  is  possible  while  laborers  are  slaves.    The  abolition 


MOTIVE  IN  INDUSTRY  115 

of  slavery  means,  for  industry,  the  substitution  of  hope 
for  fear  as  a  motive  to  work. 

The  superiority  of  the  wages  system  over  the  slavery 
system  hes  in  the  fact  that  the  worker  is  a  freeman;  that 
the  door  of  opportunity  is  opened  to  him;  and  that  it  is 
reasonable  for  him  to  entertain  an  ambition  to  rise  within 
his  class,  or  to  get  out  of  the  labor  class  altogether.  So 
far  as  the  three  tests  of  a  sound  organization  are  con- 
cerned, however,/ the  wages  system  is  but  one  step  re- 
moved from  the  slavery  system. )  The  slave  has  no  in- 
terest whatever  in  quantity,  quality,  and  care,  while  the 
wage-worker  does  have  a  roundabout,  indirect  interest 
in  the  commercial  result  of  his  work.  He  knows  that, 
unless  his  work  is  productive  this  year,  he  cannot  demand 
higher  wages  next  year,  and  so  indirectly  he  has  an  in- 
terest in  the  product.  But  this  is  certainly  a  roundabout 
way  for  presenting  to  freemen  the  motive  to  do  good  work. 
It  might  almost  be  called  an  organization  for  the  encour- 
agement of  banditry.  Strikes  and  sometimes  violence 
are  the  means  used  by  workers  to  get  their  share  of  an 
increased  product.  While,  therefore,  high  technical  skill 
may  be  acquired  under  the  wages  system,  this  system 
does  expose  society  to  the  constant  danger  of  interrup- 
tion and  disorder.  The  motive  to  work  is  not  presented 
to  workers  in  such  a  way  as  to  be  a  guarantee  of  con- 
tinuous and  contented  work. 

What  is  termed  the  co-operative  system  aims  to  organ- 
ize production  fin  such  a  way  as  to  bring  the  motive  of 
personal  interest  directly  to  bear  on  the  process  of  produc- 
tion/) By  turning  to  the  diagram  it  will  be  seen  that  all 
workers,  employees  as  well  as  employers,  have  a  "direct 
interest  in  quantity,  quality,  and  the  care  of  material." 


116  DESCRIPTION  OF  INDUSTRY 

This  is  by  all  odds  the  best  form  of  organization,  for  it 
presents  to  every  worker  a  motive  for  the  attainment  of 
efficiency,  (j'he  pay  of  all  is  in  proportion  to  the  productive 
capacity  of  all,  and  on  that  account  each  worker  comes  to 
have  personal  responsibility  for  the  manner  in  which  others 
work. 

(c)  Lesson  Taught  by  the  Comparison. — Sufficient  has 
been  said  to  make  clear  the  lesson  taught  by  a  comparative 
study  of  the  wages  system.  (From  the  point  of  view  of 
motive,  our  present  organization  is  far  from  satisfactory.  J 
By  what  path  a  more  perfect  adjustment  of  motives  will 
be  attained  raises  many  far-reaching  problems.  Our  pres- 
ent purpose  is  confined  to  an  explanatory  description  of 
the  business  world  as  it  now  is.  That  description  must 
recognize  the  prevalent  discontent  of  the  labor  class  with 
their  position  in  our  industrial  organization.  The  fore- 
going comparison  of  the  slavery  system,  the  wages 
system,  and  the  co-operative  system,  makes  evident  the 
cause  of  that  discontent.  Our  present  organization  of  in- 
dustry does  not  present  the  motives  for  work  to  all  workers 
in  an  effective  manner. 

This  criticism  of  the  present  method  of  motivizing  labor 
has  been  frequently  made.  Piecework,  which  makes  the 
pay  to  depend  on  the  amount  of  work  done,  aims  to  pre- 
sent to  workers  a  motive  for  intense  work.  Technical 
co-operation,  which  is  a  proposal  that  all  workers  should 
own  part  of  the  capital  that  gives  them  employment,  is 
another  proposal  which  aims  to  interest  all  workers  in 
their  work.  Profit  sharing  is  yet  another  scheme  designed 
to  make  the  pay  fluctuate  with  the  success  of  the  business 
rather  than  with  the  number  of  hours  a  day  spent.  Pre- 
mium work  should  also  be  mentioned  in  this  oonnection, 


MOTIVE  IN  INDUSTRY  117 

and  on  top  of  them  all  is  the  dream  of  a  Federation  of 
Industries.  The  mention  of  these  plans  and  programs 
brings  into  yet  stronger  light  the  fact  that  discontent  with 
the  wages  system  is  a  very  patent  fact  in  our  present 
industrial  order.  The  point  of  our  lesson  is,  that  the  ex- 
planation of  that  discontent  is  found  in  the  inadequate 
and  illogical  way  in  which  motive  is  presented  to  workers. 
The  problem  thus  raised  is  a  fundamental  one.  It  is,  at 
bottom,  a  problem  of  industrial  organization. 


CHAPTER  VII 
CONTROL  IN  INDUSTRY 

"Competition,  or  the  unimpeded  pressure  of  individual  on  in- 
dividual, has  been  from  the  beginning,  a  great  force  in  societies." — 

Arnold  Toynbee. 

There  are  two  principles  of  control  by  which  the  social 
relations  of  men  are  guided.  The  one  is  the  coercive  prig." 
rjjTle  exercised  bv  governments  the  other  is  the  coiapeti- 
tive  principle  which  works  through  the  agency  of  self- 
interest.  We  shall  now  undertake  an  analysis  of  this  latter 
principle. 

§  31.  Statement  of  the  Question. — The  industrial  world 
of  to-day  aims  to  maintain  and  encourage  industrial  free- 
dom. If  men  own  land,  they  can  use  it  as  they  see  fit;  if 
they  possess  wealth,  they  are  free  to  consume  it  in  pleasure, 
or  to  invest  it  in  business.  Every  man  has  the  right  to 
receive  wages  from  whomsoever  is  willing  to  pay,  and  to 
pay  wages  to  whomsoever  is  willing  to  work.  In  the  selec- 
tion of  a  trade,  a  profession,  or  a  line  of  business,  each 
individual  is  free  to  make  his  own  choice.  If  men  join 
with  others  for  co-operative  work,  they  do  so  voluntarily; 
they  come  to  an  understanding  as  to  the  terms  of  their 
joint  work,  and  express  these  terms  in  the  form  of  a  con- 
tract. (The  modern  business  world  is  a  regime  of  contract;^ 
it  is  held  together  by  working  agreements;  it  rests  on 
mutual  understanding;  it  is,  in  short,  organized  in  such  a 
way  as  to  realize  industrial  freedom,  so  far  as  that  can  be 
done  through  established  customs  or  through  law. 

118 


!  CONTROL  IN  INDUSTRY  119 

But  industrial  eflSciency  is  as  important  as  industrial 
freedom.  A  high^tandard  of  living  is  universally  regarded 
as  desirable,  and  such  a  standard  is  limited  by  the  amount 
that  workers  are  able  to  produce.  To  attain  efficiency  in 
production,  each  worker  must,  in  some  way,  be  forced  to 
adopt  that  line  of  work  for  which  he  is  best  fitted;  each 
property  owner  must  be  required  to  use  his  property  so  as 
to  be  of  the  highest  possible  assistance  to  workers  in  the 
production  of  goods.  For  the  successful  management  of 
co-operative  work,  whether  in  large  industries  or  small,  one 
class  of  workers  is  obliged  to  accept  orders  from  other 
workers.  Strict  discipline  and  complete  subordination  on 
the  part  of  all  workers,  whether  managers  or  laborers,  is 
required  for  a  prosperous  business.  How  can  this  be 
brought  about  in  a  society  in  which  every  worker,  and 
every  owner  of  property,  can  do  as  he  pleases  with  himself 
and  with  his  own?  When  we  are  able  to  answer  this  ques- 
tion, we  shall  have  discovered  the  principle  of  control  in 
the  modern  business  world. 

Another  need  for  control  in  industry  may  be  named. 
The  business  world  as  it  moves  on  from  day  to  day  is  not 
altogether  an  harmonious  world.  It  is  true  that  all  work 
is  co-operative,  but  it  cannot  be  said  that  all  the  interests 
of  all  workers  are  the  same.  This,  at  least,  is  the  way  it 
appears  to  the  men  who  do  the  work.  If  an  employer 
pays  more  in  wages,  it  seems  to  him  that  he  is  getting 
less  in  profits;  if  a  rise  in  the  price  of  wheat  gives  the 
farmer  increased  profits,  the  consumers  of  bread  feel 
themselves  aggrieved;  if  Kansas  City  jobbers  increase 
their  sales,  Chicago  jobbers  say  that  such  an  increase  of 
sales  on  the  part  of  Kansas  City  is  an  encroachment  on 
Chicago  territory.    Many  other  illustrations  might  be 


120  DESCRIPTION  OF  INDUSTRY 

given  to  show  that  what  is  to  the  advantage  of  one  per- 
son, or  class,  or  locality,  may  be  to  the  disadvantage  of 
another  person,  class,  or  locality. 

Under  such  conditions,  it  is  evident  that  some  power- 
ful force  that  makes  for  agreement  is  essential.  What 
is  this  force  that  tends  to  harmonize  conflicting  interests 
and  keep  production  going?  How  does  it  operate?  What 
are  the  results  it  has  produced?  These  are  questions 
to  be  considered  in  the  present  chapter. 

§  32.  Marks  of  a  Successful  Industrial  Organization. 
The  dominant  control  over  industrial  affairs  is  exercised 
through  the  free  play  of  business  interests.  This  must 
be  the  case  in  a  business  world  that  rests  on  personal 
choice  and  voluntary  agreement.  It  is,  however,  easier 
to  say  this  than  to  make  clear  what  it  means.  As  a 
first  step  in  its  explanation,  we  shall  consider  certain 
marks  ofa  well-organized  industrial  society,  and  endeavor 
to  see  how  such  results  tend  to  be  brought  about  by 
allowing  every  man  to  manage  his  own  affairs.  Five 
classes  of  results,  all  of  which  are  realized  to  some  extent 
in  the  modern  business  world,  will  be  passed  in  review. 

(a)  The^lacement  of  Me2i.=— All  men  stand  as  equals 
before  the  law,  but  this  does  not  mean  that  all  men  are 
equally  fitted  for  every  kind  of  work.  (^Some  take  nat- 
urally to  one  trade  or  prof ession^  while  others  are  pecul- 
iarly fitted  for  other  kinds  of  occupations.  This  difference 
in  the  natural  aptitude  of  workers  may  be  seen  early 
in  life.  Some  boys,  for  example,  are  bom  with  a  mechan- 
ical bent;  others  understand  animals  and  birds  without 
knowing  where  they  learned;  still  others  show  themselves 
as  leaders  who  are  able  to  make  a  football  team  out  of 
eleven  raw  boys.    We  all  know  that  boys  are  diffea«nt. 


CONTROL  IN  INDUSTRY  HI 

They  may  be  equals  intellectually  and  physically,  but 
they  are  different.  These  differences  are  carried  into 
manhood  and  must  be  recognized  by  a  successfully 
organized  industry.  Each  worker  must  be  placed  where 
he  can  work  contentedly  and  efficiently. 
(But  natural  aptitude  is  not  as  important  as  trained 
ability. )  Every  system  of  industry,  even  slavery,  recog- 
nizes the  need  of  training  of  some  sort.  The  English 
gilds  of  the  fourteenth  century  required  seven  years  of 
apprenticeship  before  a  boy  was  admitted  to  the  trade 
as  a  man  worker.  In  the  early  days  of  steamboats  on 
the  Mississippi  River,  eleven  years  of  training  and  expe- 
rience were  required  before  a  man  was  ranked  as  a  re- 
sponsible river  pilot.  At  present,  in  the  world  of  industry, 
schools  have  largely  taken  the  place  of  apprenticeships. 
This  explains  trade  schools  and  business  courses  in  high 
schools;  as  well  as  engineering  schools,  medical  schools, 
teachers'  schools,  commercial  schools,  and  the  like,  in  our 
universities.  It  explains,  also,  the  schools  that  railways 
and  many  manufacturers  have  provided  for  their  em- 
ployees; and,  finally,  it  explains  that  employment  itself 
is  an  educative  process,  and  tends  to  make  a  specialist 
of  every  worker  in  the  line  of  the  work  he  is  doing. 

Our  question  at  present,  however,  is  a  different  question. 
The  modern  business  world  is  a  world  of  organized  spe- 
cialists, and  its  efficiency  depends  on  a  proper  placement 
of  its  men.  How  are  workers  placed?  Who  selects  them, 
or  rather  what  is  the  process  by  which  selection  is  made 
so  that  the  industrial  ability  of  every  man,  whether 
natural  or  acquired,  shall  be  used  in  the  most  effective 
manner?  To  make  this  selection,  and  assign  to  each 
worker  his  proper  place  for  work,  is  one  of  the  chief  serv- 


122  DESCRIPTION  OF  INDUSTRY 

ices  rendered  by  the  principle  of  control  in  our  modem 
industrial  society  based  on  industrial  freedom. 

Two  steps  may  be  observed  in  the  working  out  of  this 
selection.  In  the  first  place,  the  leaders,  or  industrial 
managers,  must  be  selected  and  forced  to  work  in  their 
proper  places,  i^his  is  done  by  competition  between 
men  to  become  managers.  jThe  process  may  be  made 
clear  by  comparing  two  methods  of  selection. 

In  matters  of  government,  society  selects  its  managers 
by  popular  vote.  The  Governor  of  the  state,  the  mayor 
of  a  city,  or  the  supervisors  of  a  county,  are  elected  to 
perform  the  duties  of  their  respective  oflSces.  They  are 
selected  by  ballot  and  placed  in  office  by  the  direct  choice 
of  the  citizens. 

Industrial  matters,  however,  lie  outside  the  sphere  of 
government,  and  no  such  method  of  selection  is  possible. 
The  management  of  industry  is  not  at  the  disposal  of 
popular  vote.  In  this  case,  anybody  is  at  liberty  to  try 
to  become  a  manager  in  any  line  of  industry  he  may 
choose.  If  he  succeeds,  he  continues  to  be  a  manager, 
and  will  expand  the  business  over  which  he  assumes 
management  until  he  has  reached  the  limit  of  his  ability, 
or  the  limit  of  the  market  for  the  goods  he  makes.  If  he 
fails,  he  ceases  to  be  a  manager  and  disappears  from  the 
class  of  managers.  It  is  by  this  means  that  industrial 
society  selects  its  business  leaders.  C-The  selection  is  by 
trial  and  only  the  best  men  stay  .J  In  this  way,  it  is  claimed, 
the  management  of  the  world's  industries  are  forced  into 
the  hands  of  those  who  are  the  best  fitted  for  the  task. 
They  are  the  only  ones  who  can  survive  the  test  of  business 
competition. 

The  second  step  in  the  selection  and  placement  of 


CONTROL  IN  INDUSTRY  12S 

workers  pertains_to  those  who  work  under  the  direction 
of  the  manager.  This  seems,  on  the  surface,  to  be  merely 
a  question  of  personal  authority.  The  manager  selects 
his  subordinates  and  they,  in  turn,  employ  the  workers. 
(But  further  analysis  shows  that  here,  too,  the  selection  is 
by  trial,  j  Industries  are  operated  for  profit;  the  rate  of 
profit  earned  is  the  test  of  management,  and  every  man- 
ager will,  consequently,  select  his  co-workers  for  their 
ability  and  place  them  where  they  will  be  most  eflScient. 

Although  this  selection  rests  on  personal  authority, 
it  is  not  arbitrary.  A  boy  who  for  the  first  time  seeks  a 
place  on  the  payroll  of  an  established  business,  will  be 
subjected  to  gi>me  kind  of  test.  His  personal  appearance, 
the  kind  of  family  he  comes  from,  his  habits  as  shown  by 
the  school  record,  will  all  have  some  weight.  Perhaps 
recommendations  of  good  character  will  be  demanded, 
or  the  boy  will  be  required  to  pass  an  examination  to 
show  fitness.  These  tests  are  all  phases  of  business  com- 
petition which  have  for  their  purpose  the  selection  of 
only  those  boys  for  employment  who  are  able  to  help 
make  the  business  profitable. 

But  selection  and  placement  does  not  stop  with  the 
writing  of  a  name  on  the  payroll.  After  that  comes  the 
process  of  shifting  and  promotion,  and  this  is  on  the 
whole  a  process  of  competition.  The  employees  are  look- 
ing out  for  promotion,  and  the  managers  are  looking  out 
for  men  to  promote.  By  promotion  we  mean  the  place- 
ment of  an  employee  in  a  position  of  greater  responsibility 
and  higher  pay.  Such  promotion  is  the  result  of  trial, 
and  is  made  because  the  employee  has  shown,  in  the  posi- 
tion he  previously  occupied,  that  he  can  contribute  more 
to  the  profit  of  the  business  in  his  new  place  than  any 


124  DESCRIPTION  OF  INDUSTRY 

other  available  man.  How  this  test  is  made  is  of  no  im- 
portance for  the  statement  of  the  theory  of  selection. 
Many  expedients  may  be  used  to  test  fitness  for  promo^ 
tion.  The  point  is,  that  if  unfit  promotions  are  made, 
the  business  will  fail  to  show  a  profit,  and  the  manager 
who  is  responsible  for  them  will  go  to  the  wall.  (  Not 
only  are  managers  selected  by  trial,  that  is  to  say,  by 
competition,  but  employees  also  find  their  place  in  in- 
dustry by  a  competitive  selection  working  through  the 
interest  of  the  manager,  y  The  principle  that  controls  in 
industry,  so  far  as  the  selection  and  placement  of  workers 
is  concerned,  is  the  principle  of  competition,  and  for  this 
service  its  application  is  universal.  « 

(h)  The  Adjustment  of  Production. — In  an  industrial 
society  organized  for  profit,  it  is  essential  that  only  those 
goods  should  be  produced  that  are  needed  by  the  com- 
munity. This  is  true  because  the  only  way  of  getting  a 
profit  out  of  production  is  by  sale  of  the  goods  produced, 
and  unless  the  manager  has  guessed  correctly  what  the 
consumer  wants,  he  cannot  expect  his  goods  to  be  sold 
when  placed  on  the  market.  Here,  again,  we  have  a  trial. 
Different  managers  guess  differently  as  to  the  kind  of 
goods  the  market  will  take,  and,  as  a  result,  large  quanti- 
ties of  different  sorts  of  goods  are  made.  Those  who  have 
guessed  the  needs  of  the  community  correctly,  sell  their 
goods.  They  get  back  the  money  spent  in  production 
with  a  profit  besides,  and  are  in  a  position  to  begin  again 
the  process  of  production.  A  few  years  of  this  means  an 
established  business. 

On  the  other  hand,  those  managers  who  have  produced 
goods  that  the  community  does  not  want,  will  find  no 
sale  for  their  products.    Not  only  do  they  fail  to  make  a 


CONTROL  IN  INDUSTRY  125 

profit,  but  they  lose  the  money  spent  in  making  the  goods. 
This  cannot  go  on  very  long.  Sooner  or  later,  such  man- 
agers fail,  or,  if  they  do  not  fail  and  go  out  of  business, 
they  will  change  their  line  of  production  in  order  to  make 
what  the  community  is  willing  to  buy. 
(But  it  is  not  enough  for  managers  to  choose  the  right 
kind§_of  goods  to  be  produced;  they  must  judge  also  of 
the  quantity  that  can  be  sold  at  profitable  prices  J  Busi- 
ness men  have  many  helps  in  making  this  guess.  Whole- 
sale dealers  employ  "traveling  men"  whose  task  it  is, 
not  only  to  sell  goods  on  hand,  but  to  feel  out  the  future 
demand  for  goods.  The  wholesale  dealers  act  on  the 
reports  of  their  traveling  salesmen  in  placing  orders  with 
manufacturers,  and  manufacturers  in  turn  decide  how 
much  of  certain  things  to  produce,  by  the  amount  and 
character  of  such  orders.  We  have  already  seen  that 
trade  papers  and  government  reports  are  essential  parts 
of  the  machinery  of  a  market;  we  may  now  say  that  the 
successful  manager  is  one  who  can  make  proper  use  of 
this  material. 

f  The  truth  is,  that  too  many  mistakes  in  guessing  the 
amount  of  useful  goods  that  can  be  sold,  is  sure  to  result 
in  a  national  catastrophe.)  It  is  sure  to  result  in  an  ab- 
normal number  of  bankruptcies.  This  will  cause  many 
industries  to  shut  down,  and  large  numbers  of  workers 
will  be  thrown  out  of  work  in  consequence.  The  usual 
income  of  these  workers  being  thus  cut  off,  they  cannot 
buy  as  much  as  they  were  accustomed  to  buy,  and  other 
industries  that  depended  on  such  workers  to  take  their 
goods,  will  be  forced  to  go  out  of  business.  This  is  one 
phase  of  what  is  called  "commercial  depression."  We 
are  not  here  concerned,  however,  with  a  business  crisis  or 


126  DESCRIPTION  OF  INDUSTRY 

'commercial  depression  farther  than  to  note,  that  it  is  a 
time  of  special  trial  for  those  who  manage  industries.) 
The  relative  abilities  of  managers  are  tested  by  this  par- 
tial collapse  of  the  market,  and  only  those  managers  who 
are  the  best  fitted  to  meet  the  trial  will  stand  the  test. 
The  relatively  inefficient  are  forced  to  the  wall,  and  when 
somehow  business  prosperity  returns,  the  most  successful 
guessers  will  be  found  in  command  of  industrial  enter- 
prises. 

The  foregoing  paragraph  assumes  a  widespread  com- 
mercial disaster.  (The  same  tendency  may  be  observed 
during  the  years  of  ordinary  business  prosperity,  j  Sup- 
pose the  makers  of  a  particular  line  of  goods  misjudge  the 
market  and  produce  more  of  this  line  than  can  be  sold. 
Some  of  the  industries  engaged  in  this  line  must  fail,  and, 
provided  other  factors  that  make  for  business  success  are 
equal,  it  will  be  those  who  have  lost  the  most  money  on 
account  of  the  mistaken  estimate  of  the  market  demand. 
Here,  too,  it  is  the  best  guessers  who  survive  the  trial. 

A  contrary  assumption  shows  the  same  tendency.  Sup- 
pose the  makers  of  a  particular  line  of  goods  misjudge  the 
market  and  produce  less  of  this  line  than  could  have  been 
sold.  Those  who  have  judged  most  accurately  will  have 
the  most  to  sell  and  reap  the  largest  profit.  They  will 
thus  be  in  a  position  to  extend  their  investments  more 
surely  and  more  rapidly  than  their  rivals,  and  the  develop- 
ment of  the  business  to  supply  the  demand  will  come 
under  the  control  of  those  who  proved  themselves  to  be 
the  best  guessers. 

It  thus  becomes  evident  that  the  principle  of  control, 
upon  which  industry  relies  for  discovering  the  needs  of 
consumers  and  of  limiting  production  to  what  is  needed 


CONTROL  IN  INDUSTRY  127 

in  every  line  of  goods  produced,  is^the  principle  of  compe- 
tition. This  result  is  attained  by  opening  wide  the  door 
of  opportunity  and  trusting  to  results.  Those  who  have 
the  keen  business  sense,  or  who  master  the  details  of  what 
is  called  the  market  demand,  survive  the  trial.  All  others 
disappear  from  the  ranks  of  responsible  managers.  For 
the  direction  of  industry,  therefore,  as  well  as  for  the 
attainment  of  efficiency  in  co-operative  work,  the  modem 
business  world,  as  we  know  it,  depends  on  the  autotomic 
principle  of  business  competition  acting  through  the  uni- 
versal desire  of  gaining  profit. 

(c)  The  Application  of  Effort.^— A  third  mark  of  efficient 
industrial  organization  pertains  to  the  apphcation  of 
effort.  Where  shall  an  industry  be  located?  This  means 
the  selection  of  a  place  for  the  investment  of  capital  and 
the  employment  of  labor.  What  kind  of  an  investment 
shall  be  made?  This  means  the  choice  of  a  line  of  goods 
to  be  produced  and  of  the  kind  of  laborers  to  be  employed. 
The  selection  of  both  place  and  kind  of  industry  is  made 
xmder  the  influence  of  a  desire  for  profit,  and,  like  every- 
thing else  in  a  free  industrial  society,  is  under  the  control 
of  the  force  of  competition.  What  follows  merely  ex- 
plains how  competition  guarantees  a  proper  application 
of  effort. 

Thejocation  of  an  industry  is  a  matter  of  competition. 
The  different  locations  where  particular  interests  might  be 
located,  may  be  said  to  compete  with  each  other  for  the 
investment  of  free  capital.  If  the  business  manager  se- 
lects the  best  location,  all  things  considered,  his  invest- 
ment will  succeed.  This,  of  course,  assumes  that  all  other 
factors  that  make  for  success  are  the  same  for  all  loca- 
tions.   If,  on  the  other  hand,  he  chooses  a  wrong  place 


128  DESCRIPTION  OF  INDUSTRY 

for  his  new  industry,  he  will  fail  to  keep  the  market,  and 
others  will  make  and  sell  the  goods  he  hoped  to  make  and 
to  sell-.  One  locality  will  grow;  another  locality  will  de- 
cline. The  locality  most  fit  for  the  industry  concerned 
will  survive  the  trial.  Thus,  the  selection  of  the  best 
locations  for  industries  is  forced  on  the  business  world  in 
much  the  same  way  as  is  the  most  effective  selection  of 
men  and  of  the  kind  of  goods  to  be  produced.  All  are 
under  the  control  of  the  principle  of  competition. 

(d)  Cnmparative  Costs. — It  was  said  above,  that  compe- 
tition forced  managers  to  select  those  industries  that  pro- 
duce the  kind  of  goods  which  people  want,  because  other 
sorts  of  products  could  not  be  sold.  This  is  true,  but  this 
is  not  all  there  is  to  the  question.  It  may  be  that  con- 
sumers will  buy  any  one  of  two  or  three  kinds  of  goods. 
Which  of  the  two  or  three  kinds  of  goods  will  the  manager 
choose  to  make?  The  answer  seems  simple.  He  will 
choose  to  make  what  he  thinks  will  give  him  the  highest 
profit  for  his  investment.  This  is  correctly  reasoned,  but 
how  can  he  know  which  will  give  him  the  highest  profit? 
He  cannot  try  first  one  line  of  production  and  then  the 
other.  He  must  make  his  choice  and  stand  by  the  result. 
After  money  is  once  invested  in  a  particular  industry, 
it  cannot  be  withdrawn  and  put  into  another  line  of  busi- 
ness without  serious  loss. 

Again  we  say,  this  is  true,  but  it  is  not  all  there  is  to  the 
question.  Although  no  individual  investor  can  try  out  all 
lines  of  investment,  and  finally  choose  that  which  pays 
the  highest  rate  of  profit,  the  same  result  can  be  attained 
for  business  as  a  whole  by  an  hundred  investors,  each  of 
whom  has  a  sum  of  money  to  invest.  For  it  must  be  noted 
that  these  hundred  investors  do  not  select  their  lines  of 


CONTROL  IN  INDUSTRY  129 

production  all  at  the  same  time.  They  come  in  groups; 
ten  this  year,  ten  the  next  year,  and  ten  the  year  following. 
That  is  to  say,  investment  is  a  continuous  process.  Each 
group  of  new  investors  will  choose  that  line  of  work  that 
pays  the  highest  profit,  and  by  this  means,  the  industrial 
development  of  the  country  will  be  forced  along  the  lines 
which  for  it  are  relatively  the  most  advantageous. (it  is 
in  this  way  that  the  force  which  controls  in  the  business 
world  drives  capital  and  labor  into  those  lines  of  work 
which  pay  the  largest  profit.  This  may  be  called  a  com- 
petition of  investment  in  which  only  the  profitable  in- 
vestments survive,  ) 

The  phase  of  competition  which  we  have  just  considered 
is  what  is  called  by  economists  "the  doctrine  of  compara- 
tive costs."  This  doctrine  is  commonly  used  to  determine 
what  kind  of  goods  ought  to  be  made  in  a  country  and 
what  kind  ought  to  be  imported  from  other  countries. 
Manifestly,  a  country  should  export  those  things  which 
are  made  at  a  low  home  cost,  and  import  those  things 
which  are  made  at  a  high  home  cost.  The  country  might, 
perhaps,  make  everything,  and  go  on  without  any  foreign 
trade.  To  do  this,  however,  would  be  an  unprofitable 
use  of  the  labor  and  resources  of  the  country.  The  total 
result  of  industry  would  be  greater  if  competition  were 
permitted  to  have  full  play,  for  then  the  capital  and 
labor  of  the  country  would  be  forced  into  those  fines  which 
pay  the  highest  relative  profit. 

This  phase  of  competition  is  not  confined  to  considera- 
tions of  foreign  trade.  It  has  a  thousand  applications  in 
everyday  life.  It  is  the  force  which  guides  men  in  choosing 
what  they  shall  do  themselves  and  what  they  shall  pay 
to  have  done,    A  plumber  who  makes  60  cents  an  hour  has 


130  DESCRIPTION  OF  INDUSTRY 

a  woodpile  that  must  be  sawed.  He  can  saw  it  himself 
or  he  can  hire  a  laborer  to  saw  it  for  him  at  25  cents  an 
hour.  He  has  no  choice  in  the  matter,  at  least  no  business 
choice.  He  will  pay  the  laborer  to  saw  the  wood,  while  he 
works  at  his  trade,  and  will  have  35  cents  in  his  pocket 
at  the  end  of  each  houf-  as  the  result  of  his  bargain.  (.The 
plumber  acts  under  the  doctrine  of  comparative  costs.)  He 
compares  the  two  costs  of  getting  the  same  thing,  and 
chooses  the  method  that  costs  him  the  less.  This  phase 
of  competition  is  of  universal  application.  It  is  the  guiding 
principle  that  controls  the  assignment  of  work  among 
co-operative  workers.  Each  worker  follows  what  for  him 
gives  the  highest  profit.  For  society  at  large,  this  means 
that  every  man  is  working  in  his  proper  place,  and  the  total 
product  of  this  combined  work  is  the  greatest  possible. 
Many  illustrations  might  be  given  of  the  application  of 
the  doctrine  of  comparative  cost  and  each  one,  on  its  part, 
would  be  an  illustration  of  the  automatic  control  in  indus- 
try exercised  by  the  force  of  competition. 

(e)  Justice  in  Industry. — The  last  mark  of  a  sound 
industrial  organization  which  we  shall  consider  pertains 
to  justice  in  business  relations.  If  asked  why  business 
relations  should  be  just,  our  first  answer  is  that  justice 
should  be  realized  in  all  relations  of  life.  There  is  in  man 
a  moral  sense  that  finds  expression  in  this  demand  for 
fair  and  just  dealings. 

When  considered  from  the  point  of  view  of  industrial 
society,  however,  another  answer  may  be  given.  TThe 
realization  of  business  justice  is  essential  for  the  highest 
business  success?\  Those  contracts  which  express  the  con- 
ditions under  which  men  work  must  be  just  contracts, 
for  the  reason  that  continued  injustice  in  business  arrange- 


CONTROL  IN  INDUSTRY  131 

ments  tends  to  weaken  the  motivft  for  workers  to  apply 
themselves  with  efficiency  and  care.  Justice  and  the 
absence  of  complaint  and  strife  that  comes  with  a  sense 
that  one  is  treated  justly,  are  essential  conditions  of  high 
grade  production.  /From  the  economic  point  of  view, 
therefore,  as  well  as  from  the  moral  point  of  view,  the  reali- 
zation of  justice  in  business  relations  is  a  mark  of  a  sound 
industrial  organization,  j 

Questions  of  equity  and  justice  in  industrial  affairs 
pertain,  for  the  most  part,  to  what  is  called  the  "sharing 
of  the  product."  "Competition,"  says  Toynbee,  "has 
been  most  successful  in  increasing  the  efficiency  of  pro- 
duction; distribution  has  perhaps  lost  more  than  it  has 
gained."  Here,  without  doubt,  do  we  find  the  moral 
problem  of  our  industrial  future.  Many  criticisms  may  be 
urged  against  the  wages  system  of  industry  and  the  wages 
method  of  measuring  pay.  At  the  same  time  we  must 
give  the  principle  of  competition  its  due,  for,  at  present, 
it  is  the  agency  upon  which  we  chiefly  rely  for  the  attain- 
ment of  justice  in  human  relations.  Competition  is 
something  of  a  guarantee  that  no  flagrant  disregard  of 
equity  and  justice  is  likely  to  continue  for  any  length  of 
time.  It  may  be  true  that  some  of  the  workers  stand  so 
near  the  starvation  line  that  they  are  willing  to  accept 
any  conditions  an  employer  may  see  fit  to  offer.  But  this 
is  not  the  situation  in  which  the  great  mass  of  workers 
find  themselves.  (For  most  workers,  the  condition  of  indus- 
trial freedom  is  a  real  asset.)  Within  limits,  they  can 
refuse  to  agree  to  a  working  contract  unless  their  interests 
are  recognized.  Laborers  may  go  on  a  strike,  consumers 
may  organize  a  boycott,  men  with  money  may  decline 
to  invest  under  conditions  offered,  and  so  throughout  the 


132  DESCRIPTION  OF  INDUSTRY 

list.  The  general  result  is  that  the  actual  contracts  agreed 
upon  will  cover  something  of  what  all  co-workers  beUeve 
to  be  their  pecuhar  interests.  (Thus,  in  a  rough  way,  and 
for  the  mass  of  workers,  justice  is  attained.  The  force 
that  brings  it  about  is  the  force  that  controls  everywhere 
in  the  business  world, — the  force  of  competitionX 

§  33.  Evils  of  Competition. — It  must  not  be  assumed 
that  the  manner  in  which  competition  guides  business 
affairs  is  beyond  criticism.  Such  an  assumption  would 
not  be  correct.  Many  of  those  things  which  we  regard 
as  social  and  business  evils  may  be  traced  to  the  normal 
trend  of  competitive  forces.  Indeed,  there  are  those  who 
believe  the  evils  of  competition  to  be  so  flagrant  that 
they  urge  its  elimination  from  the  business  world,  even 
though  this  might  mean  the  sacrifice  of  what  EngUsh 
law  defines  as  industrial  freedom.  We  cannot  enter  upon 
a  discussion  of  such  a  proposal,  but  we  may  inquire  what 
some  of  these  evils  are,  and  by  this  means  throw  a  some- 
what different  light  upon  the  topic  under  discussion. 
Three  alleged  evils  traceable  to  competition  will  claim 
attention. 

(a)  The  Wadea  of  Competition. — ^Perhaps  the  most 
far-reaching  complaint  urged  against  the  competitive 
principle,  pertains  to  its  wasteful  method  of  working. 
Even  admitting  that  under  the  guidance  of  its  influence 
business  is  forced  into  the  hands  of  the  most  efficient, 
and  that  workers  are  forced  to  produce  goods  that  people 
want  and  to  produce  them  in  proper  quantities,  never- 
theless, it  is  asserted,  this  is  done  at  a  terrible  waste  of 
men,  of  capital,  and  of  opportunity.  Three  illustrations 
will  make  clear  the  nature  of  this  waste. 

A  city  has  grown  in  a  certain  locaUty  and  the  conven- 


CONTROL  IN  INDUSTRY  133 

ience  of  the  citizens  demands  the  presence  of  a  new 
grocer.  Three  grocers,  each  of  whom  selects  what  he 
regards  as  the  best  location,  set  up  stores.  Two  of  these 
must  fail,  for  there  is  business  enough  for  one  only.  The 
three  enter  upon  trial  and  the  buyers  select  the  one  who 
serves  them  the  best.  This  they  do  by  giving  him  their 
custom.  The  two  who  are  not  selected  by  this  commercial 
election  retire  from  the  contest  to  count  their  losses. 
Their  wasted  time,  wasted  capital,  and  wasted  opportunity 
is  the  price  paid  for  the  selection  of  the  best  man.  These 
losses  are  an  illustration  of  the  wastes  that  attend  the 
workings  of  the  competitive  principle. 

Another  illustration  may  be  suggested.  Twenty  young 
meojnvest  one  hundred  and  sixty  years  in  preparation 
for  a  profession.  That  is  to  say,  each  man  spends  eight 
years  at  school  before  he  is  equipped  to  compete  for 
employment.  The  industrial  demand,  however,  is  limited 
to  ten  men,  so  that  only  ten  out  of  the  twenty  can  make 
use  of  this  long  training.  This  means  that  society  finds 
a  profitable  use  for  eighty  years  of  training,  but  the  other 
eighty  years  stand  for  wasted  time  and  wasted  effort. 

The  above  illustrations  are  stripped  of  all  indirect  bene- 
fits that  flow  from  effort  as  such.  They  are  designed  to 
show  the  kind  of  waste  bound  up  with  competition  rather 
than  to  measure  such  waste.  They  also,  and  this  is  the 
important  lesson,  make  clear  the  fact  that  wastes  of  this 
sort  are  inseparable  from  industrial  control  by  means 
of  competition.  That  control  is  by  trial.  Those  who 
pass  the  trial  are  crowned  with  success;  those  who  fail 
drop  out  of  sight.  But  the  point  is,  there  must  always 
be  more  contestants  than  there  are  crowns  of  success. 
Under  no  other  condition  is  it  possible  to  make  a  trial 


134  DESCRIPTION  OF  INDUSTRY 

of  fitness.  What  we  have  termed  the  wastes  pf  competi- 
tion, therefore,  are  in  reality  the  cost  of  administering 
the  principle  of  competitive  control.  It  is  what  society 
pays  in  order  that  the  best  men  may  be  selected  for  im- 
portant industrial  positions.  If  a  better  method  of  select- 
ing industrial  leaders  can  be  devised,  these  so-called 
wastes  of  competition  may  be  eliminated;  but  until  that 
time  arrives,  our  business  world  will  continue  to  rest 
under  the  criticism  that  competition  is  a  wasteful  method 
of  procedure. 

Other  illustrations  of  waste  might  be  given,  some  of 
which  are  capable  of  remedy  by  proper  legislation,  but 
the  two  submitted  are  adequate  for  our  present  purpose. 

(b)  Thp,  TJnMnhlp.  Character  of  Industry. — If  a  man 
should  find  by  experience  that  after  four  days  of  feeUng 
well  he  was  sure  to  have  three  days  of  fever,  which  in 
turn  was  followed  by  three  days  of  chills,  he  would  think 
something  was  the  matter  and  send  for  a  doctor.  Four 
days  of  health  out  of  ten  days  of  life  cannot  be  called 
satisfactory.  Yet  this  is  quite  analogous  to  what  has 
happened  for  over  an  hundred  years  in  the  world  of 
industry. 

(^usiness  moves  in  cycles  of  about  ten  years  each.] 
Suppose  we  begin  with  a  p)eriod  of  prosperity,  that  is 
to  say,  a  condition  of  business  contentment.  Laborers 
are  employed,  investors  find  fair  investments,  the  farmer 
and  the  manufacturer  find  ready  market  for  what  they 
produce;  indeed,  it  seems  as  though  industry  might  go  on 
forever,  with  production  equal  to  consumption  and  con- 
sumption equal  to  production. 

After  three  or  four  years,  the  producers  and  investors 
become  impatient.     They  Usten  to  grand  schemes  for 


CONTROL  IN  INDUSTRY  135 

improvements  or  to  enterprises  which,  while  holding  out 
the  lure  of  high  profits,  carry  with  them  unusual  risks. 
A  period  of  what  is  called  speculative  investment  follows, 
covering  perhaps  three  years.  People  with  money  are 
hot  to  invest.  They  wish  to  get  rich  quick,  and  will 
place  their  capital  in  business  ventures  which,  in  ordinary 
times  they  would  not  look  at  twice. 

This  period  of  speculation  ends  with  a  crash.  Most  of 
the  bad  ventures  fail,  and  many  good  businesses  are 
pulled  down  with  them.  This  crash  is  called  a  "crisis" 
or  a  "panic,"  and  it  appears  with  a  regularity  that  sug- 
gests the  rising  and  setting  of  the  sun.  "Something 
like  a  ten-year  period  has  long  been  observed.  In  the 
United  States,  for  example,  financial  crises  appeared  in 
1818,  1825,  1837,  1847,  1857.  Then  came  a  break  in  the 
apparently  regular  sequence,  but  beginning  with  1873, 
the  ten-year  cycle  seemed  to  appear  again,  there  being 
well-marked  crises  in  1873,  1884,  1893,  1903."  These 
years  were  years  of  an  unusual  number  of  business  and 
banking  failures,  which  is  commercial  disaster. 

The  crisis  marks  the  beginning  of  what  is  called  "  com- 
mercial depression,"  and  for  three  years  the  outlook  on 
the  business  world  is  decidedly  gray.  Promoters  cannot 
readily  find  investors  even  for  good  undertakings.  Fac- 
tories are  shut  down  or  running  half  time.  Many  work- 
men are  out  of  work,  and  the  army  of  bummers  and 
criminals  is  easily  recruited.  For  three  or  four  years 
this  continues  until  the  business  world  again  enters  on  a 
period  of  normal  prosperity,  to  be  followed  again  by 
speculation,  crisis,  and  slump. 

Manifestly,  an  industrial  organization  with  such  a 
history  is  exposed  to  the  severest  censure.   The  persistent 


136  DESCRIPTION  OF  INDUSTRY 

recurrence  of  crises  and  commercial  depressions  shows 
that  something  is  wrong  somewhere;  and  there  are  those 
who  assert  that  the  evil  here  complained  of  is  the  normal 
outcome  of  the  present  organization  of  the  business  world. 
There  is  enough  truth  in  this  assertion  to  warrant  the 
statement  that  the  instability  of  industrial  conditions  is  a 
just  criticism  on  the  industrial  control  exercised  by  the 
principle  of  competition. 

(c)  Useless  Investments  of  CamtdL — A  third  illustration 
brings  to  light  the  fact  that  the  motive  of  gain  leads  to 
many  useless  investments  of  capital.  The  wastes  here 
brought  to  notice  are  of  a  different  sort  from  those  con- 
sidered above.  They  are  an  absolute  loss,  being  the 
result  of  an  attempt  on  the  part  of  one  set  of  men  to 
grab  the  value  which  other  men  by  their  industry  have 
created.  There  is  little  or  no  social  compensation  for 
this  kind  of  loss.  A  railroad,  let  us  say,  is  operated  be- 
tween New  York  and  Chicago,  and  operated  at  high 
profit;  but  this  road  can  easily  carry  all  the  passengers 
and  freight  offered  for  transportation.  A  second  road 
is  built  at  a  cost  of  50  million  dollars,  and  its  managers 
threaten  a  war  of  competition  with  the  old  road,  unless 
the  managers  of  the  old  road  will  buy  the  new  property. 
This,  of  course,  is  a  commercial  hold-up,  but  it  illustrates 
a  kind  of  business  enterprise  that  is  altogether  too  com- 
mon where  competition  is  allowed  full  sway.  The  new 
road  is  bought  because  it  is  cheaper  to  pay  the  hold-up 
price  than  to  suffer  the  loss  which  a  war  of  competition 
would  entail.  From  the  public  point  of  view,  the  build- 
ing of  this  new  property  is  a  loss  of  50  million  dollars. 
When  one  thinks  that  thousands  of  useless  enterprises 
are  started  every  year,  and  that  some  one  somewhere 


CONTROL  IN  INDUSTRY  137 

pays  for  this  lost  capital,  the  evil  brought  to  light  by  the 
above  illustration  must  be  regarded  seriously.  Our  free 
industrial  society  tempts  men  to  try  to  make  money 
without  rendering  any  useful  service. 

Other  classes  of  evils  might  be  named,  but  the  above 
illustrations  are  adequate  to  suggest  the  lesson  to  be 
learned.  The  purpose  of  a  well-ordered  industrial  society 
should  be  to  curb  the  evils  while  fostering  the  benefits 
that  flow  from  the  free  play  of  self-interest. 


CHAPTER  VIII 
THE  MARKET 

"...  the  existence  of  markets,  where  men  might  be  confident 
of  obtaining  money  for  their  wares,  and  of  obtaining  wares  for  their 
money." — Ashley. 

It  has  been  shown  in  the  foregoing  chapters  that  goods 
are  made  to  be  sold  rather  than  to  be  consumed  by  those 
who  make  them,  and  that  practically  all  goods  pass 
through  the  market  on  their  way  from  the  producer  to 
the  consumer.  It  has  been  shown  further  that  a  market 
is  needed  in  order  to  enable  workers  to  become  eflScient 
through  specialization  in  their  work,  and  that  men  who 
give  their  time  and  energy  to  commerce  and  transporta- 
tion aje  producers,  as  well  as  farmers  or  manufacturers. 
It  is  thus  evident  that  a  market  of  some  sort  is  a  nec- 
essary part  of  any  organization  of  workers  worthy  of 
the  name  of  an  industrial  society.  The  present  chapter 
will  consider  further  the  character  and  service  of  a 
market. 

§  34.  General  Description  of  a  Market. — As  originally 
used,  the  word  market  meant  a  public  place  or  a  public 
building  where  goods  were  exposed  for  sale.  This  was  at 
least  true  during  the  early  period  of  English  history. 
Market  towns,  market  places,  market  days,  fairs  and 
traveling  merchants,  were  familiar  objects  to  the  common 
people  of  the  thirteenth  and  fourteenth  centuries.  Nor 
has  this  form  of  the  market  entirely  passed  away.  In 
some  of  our  American  cities,  especially  those  where  the 

138 


THE  MARKET  139 

climate  is  mild,  we  still  have  markets  and  market  days 
similar  to  those  that  existed  in  earlier  times;  that  is  to 
say,  we  have  a  large  building  or  an  open  place  fixed  up 
with  stalls  or  booths  where,  on  certain  days  of  the  week, 
meats,  fish,  vegetables,  fruits,  and  indeed  almost  any  of 
the  simple  products  one  cares  to  bring,  are  offered  for 
sale.  All  day  long  buyers  come  to  make  choice  of  what 
they  desire  to  purchase.  The  earlier  buyers  are  usually 
the  well-to-do  people  who  care  more  for  the  quality  of 
what  they  buy  than  for  the  price  which  they  pay.  Those 
whose  buying  is  limited  by  a  leaner  purse  will  come  later 
in  the  day,  when,  by  the  "higgling  of  the  market,"  as 
Adam  Smith  calls  it,  they  get  what  they  want  at  a  re- 
duced price.  The  ability  of  the  purchaser  to  pay  changes 
from  hour  to  hour  and  the  price  follows,  until,  from  ten  to 
twelve  on  a  Saturday  night,  goods  are  offered  at  almost 
any  price  that  will  clear  the  market. 

In  this  simple  illustration  do  we  find  the  three  essential 
elements  of  a  market : 

The  sellers,  who  furnish  the  supply; 

The  buyers,  who  furnish  the  demand ;  and 

The  price,  which  moves  up  and  down  in  such  a  way  as 
to  tend  to  equalize  demand  and  supply. 

§  35.  Characteristics  of  the  Modem  Market. — The 
market  above  described  is  not,  however,  typical  of  the 
method  of  buying  and  selling  goods  followed  in  the  mod- 
ern business  world.  The  form  of  the  market  changes 
from  time  to  time  in  order  to  adjust  itself  to  the  changes 
that  have  taken  place  in  the  methods  of  producing  goods. 
Even  where  industry  is  adjusted  to  tools,  as  was  the  case 
in  England  before  the  industrial  revolution,  quite  a 
number  of  different  methods  were  devised  for  the  ex- 


140  DESCRIPTION  OF  INDUSTRY 

change  of  goods;  but  since  machinery  has  taken  the  place 
of  tools,  and  the  factory  system  of  industry  has  become 
universal,  the  market  has  assumed  a  form  and  developed 
functions  that  would  have  been  quite  out  of  place  under 
the  old  conditions  of  production.  There  is  no  better  way 
of  coming  to  understand  what  is  meant  by  the  modem 
market  than  to  list  these  changes,  and  to  say  a  few  words 
respecting  each  of  them. 
These  changes  are  six  in  number  and  as  follows: 
(a)  Retail  Stores. — In  the  first  place,  retail  stores  have 
for  the  most  part  taken  the  place  of  the  old  "market" 
with  its  central  location  and  market  days.  General  mer- 
chandise, hardwares,  and  notions  of  all  sorts,  are  now  sold 
by  storekeepers  who  have  established  places  of  doing 
business.  This  change  is  doubtless  explained  by  the  great 
variety  of  goods  which  a  merchant  now  must  carry  in 
order  to  meet  the  tastes  of  a  great  variety  of  customers. 
The  convenience  of  the  customer  also  requires  these  stores 
to  be  kept  open  on  all  business  days.  Groceries  and  pro- 
visions, as  well  as  manufactured  goods,  are  sold  at  stores 
scattered  over  the  town,  and  by  men  who  have  nothing 
to  do  with  the  production  of  the  goods  sold.  Thus  the 
modern  "butcher"  knows  nothing  of  that  trade;  he  buys 
his  meats  of  the  great  slaughter-houses  and  cuts  them 
to  supply  the  orders  of  customers.  The  green-grocer  is 
merely  a  middleman  between  the  gardener  and  the  con- 
sumer. Indeed  all  merchants,  of  all  sorts,  are  middlemen. 
This  is  claimed  to  be,  and  doubtless  is,  in  the  interest  of 
economy.  It  is  certainly  one  phase  of  the  tendency  toward 
specialization  in  industry,  already  described;  but,  what- 
ever the  cause,  it  is  important  to  know  that  this  great 
body  of  middlemen  who  retail  goods  bought  at  wholesale, 


THE  MARKET  141 

or,  as  in  the  case  of  garden-truck,  bought  directly  from 
the  producer,  is  an  essential  part  of  the  modern  market 
as  it  exists  in  the  business  world  to-day. 

(b)  Whoksale  Deaferg^— The  storekeepers  described  in 
the  foregoing  paragraph  are  retail  merchants.  There 
are  also  wholesale  merchants.  The  second  feature  of 
the  modem  market  pertains  to  the  organization  of  the 
wholesale  trade.  Between  the  manufacturer  and  pro- 
ducer, on  the  one  hand,  and  the  retail  dealer  on  the  other, 
are  found  a  great  variety  of  commission  merchants,  sales 
agencies,  and  wholesale  dealers,  whose  task  it  is  to  sup- 
ply retail  dealers  with  goods  to  be  sold.  They,  like  the 
retailers,  are  middlemen;  but  the  buying  and  selling  of 
each  is  limited  to  a  few  classes  of  goods.  Their  work  is 
specialized  along  the  same  general  lines  that  the  process 
of  manufacturing  is  specialized.  Books  have  been  writ- 
ten, and  many  more  will  be  written,  on  the  organization 
of  this  branch  of  commerce.  All  that  we  now  need  to 
know  is  that  these  wholesale  middlemen,  like  the  retail 
middlemen,  came  into  existence  at  the  call  of  specializa- 
tion in  industry.  The  manufacturer  does  not  usually 
care  to  sell  directly  to  the  storekeeper  through  whom  his 
products  are  supplied  to  consumers.  This  is  a  branch 
of  the  business  of  which  he  knows  nothing,  and  to  learn 
it  would  divert  his  attention  from  his  own  special  task  of 
running  the  factory.  It  is,  therefore,  in  the  interest  of 
economy  and  efficiency,  and  consequently  leads  to  a  low 
cost  of  production,  that  wholesalers  should  take  the  out- 
put of  the  factories  and  sell  to  retailers.  The  situation 
with  regard  to  merchants  will  be  made  clear,  if  it  is  seen 
that  the  wholesalers  specialize  along  particular  lines  of 
production,  while  the  retailers  specialize  in  listing  and 


142  DESCRIPTION  OF  INDUSTRY 

measuring  the  demand  of  consumers.  The  wholesalers 
and  the  retailers  together,  bridge  over  the  chasm  between 
the  manufacturer  and  the  consumer. 

(c)  Demand  Measured  Through  the  Market. — At  this 
point  another  service  rendered  by  middlemen,  retailers 
as  well  as  wholesalers,  should  be  mentioned;  and,  as  there 
was  nothing  quite  like  it  in  the  primitive  market,  it  may 
be  called  a  third  difference  between  the  modern  and  the 
old.  It  is  evident  that  if  a  manufacturer  makes  more 
goods  than  the  people  want,  or  that  they  can  buy  with 
what  money  they  have,  he  cannot  sell  all  of  his  output; 
and,  if  he  keeps  on  making  goods  that  cannot  be  sold,  he 
will  certainly  become  a  bankrupt.  It  is  of  the  utmost 
importance  to  the  manufacturer,  therefore,  to  know  what 
the  people  are  likely  to  want,  and  how  much  they  will  be 
able  to  pay,  before  he  decides  how  much  he  shall  make  of 
his  particular  line  of  goods.  It  is  also  important  for  so- 
ciety as  a  whole  that  manufacturers  as  a  class  make  things 
that  are  wanted,  and  only  so  much  of  them  as  will  be 
bought;  for  the  work  and  the  power  spent  in  making  too 
much  of  even  a  good  thing  is  wasted  work  and  wasted 
power.  The  waste  of  labor  or  of  capital  is  a  dead  loss  to 
the  community. 

How  is  the  manufacturer  to  find  out  what  quantity 
of  goods  he  shall  make?  The  answer  to  this  question  has 
already  been  suggested.  /Under  modern  business  condi- 
tions it  is  a  peculiar  service  of  the  middlemen  to  furnish 
the  manufacturer  with  this  information. J  They  are  not 
hired  to  render  this  service.  Perhaps  they  do  not  know 
that  they  are  the  means  of  giving  the  manufacturer  the 
information  which  enables  him  to  decide  on  the  kind  and 
the  quantity  of  his  output,  fit  all  comes  naturally  from 


THE  MARKET  143 

the  process  of  purchase  and  of  sale.  I  An  illustration  will 
make  it  clear. 

Let  us  suppose  that  the  wheat  and  com  crops  of  the 
Northwest,  which  for  several  years  have  yielded  large 
returns,  are  a  failure.  The  farmers  have  little  or  nothing 
as  the  result  of  this  year's  work  with  which  to  buy,  and, 
being  prudent  farmers,  they  hesitate  to  draw  on  their 
money  in  the  savings  banks  except  for  absolute  neces- 
sities. The  new  barn  that  the  farmer  had  promised 
himself  is  given  up,  and  so  the  cement,  the  lumber,  the 
nails  and  the  paint,  which  he  intended  to  buy,  are  not 
bought.  The  farmer's  wife  had  the  promise  of  a  new 
coal  range,  but,  without  the  crop,  she  must  get  along 
another  year  with  the  old  one.  The  girls  can  have  no 
new  dresses;  the  boys  must  drive  with  the  old  harness, 
and  so  throughout  the  entire  list  of  usual  expenditures. 
The  experience  of  this  family  is  the  experience  of  thou- 
sands. No  family  in  the  Northwest,  which  is  depend- 
ent for  an  income  on  the  yield  of  wheat  and  of  corn,  can 
buy  as  much  as  it  is  accustomed  to  buy.(jrhe  first 
dealer  to  feel  this  curtailment,  or  retrenchment  as  it  is 
called,  is  the  local  storekeeper,  j  He  finds  that  his  sales  are 
falling  off,  and,  by  talking  to  customers,  he  learns  the 
reason  why.  The  jobbers  and  wholesale  dealers,  in  the 
next  place,  find  that  they  cannot  persuade  the  store- 
keepers to  take  their  goods  as  freely  as  in  previous  years, 
and  this  in  turn  is  reported  to  the  manufacturer  by  the 
failure  to  order  the  usual  amount  of  goods. 

In  the  older  markets  there  was  little  change  from  year 
to  year  in  the  kind  or  amount  of  goods  demanded;  but 
at  present  the  character  and  the  amount  is  changed 
every  year,  if  not  every  month.    There  are  many  reasons 


144  DESCRIPTION  OF  INDUSTRY 

for  this  besides  the  one  named  in  the  illustration  given 
above.  It  is  the  mark  of  a  good  market  that  the  current 
supply  should  adjust  itself  to  the  current  demand,  and 
it  is  the  peculiar  service  of  the  retail  and  wholesale  middle- 
men to  furnish  the  manufacturer  with  the  information 
which  will  enable  him  to  do  this  in  an  accurate  manner. 
In  this  respect  the  modern  market  differs  materially  from 
primitive  markets. 

(d)  The  National  Market— The  modem  market  differs 
also  from  the  early  markets  in  the  extent  of  the  territory 
which  it  serves.  In  England  in  the  fourteenth  century 
the  rule  was  laid  down  that  a  new  market  should  not  be 
established  within  the  radius  of  about  seven  miles  of 
an  already  established  market.  The  reason  for  selecting 
this  distance  was  that  seven  miles  was  about  the  distance 
that  could  easily  be  traveled  by  producers  when  bringing 
their  goods  for  sale.  In  that  century  England  was  covered 
with  a  large  number  of  local  markets.  The  danger,  as 
well  as  the  cost,  of  transportation  was  so  great  as  to  make 
any  considerable  amount  of  traffic  between  different 
parts  of  the  country  impossible. 

In  this  respect  the  modern  market  is  entirely  different. 
/The  goods  offered  for  sale  by  the  smallest  retail  merchant 
come  from  all  parts  of  the  country.  ^  We  can  no  longer 
speak  of  local  markets.  Every  merchant,  no  matter  how 
small  his  store  or  restricted  his  sales,  is  a  part  of  the  na- 
tional market,  if  not,  indeed,  of  the  world's  market.  The 
business  world  in  which  we  live  is  a  single  business  world. 
The  substitution  of  a  national  market  or  a  world's  market 
for  a  local  market,  is  perhaps  the  most  significant  single  fact 
recorded  by  the  history  of  industry.  Some  of  the  results  of 
this  change  will  be  noted  in  the  latter  part  of  this  chapter. 


THE  MARKET  145 

(e)  Market  for  Stayles. — The  above  description  does 
not  account  for  all  classes  of  merchants  known  to  modem 
business.  Besides  wholesalers  and  retailers  who  deal  in 
finished  products,  the  modern  market  makes  provision 
for  dealers  in/ staples,  or  partly  finished  products,  whose 
customers  are  manufacturers  or  exporters  rather  than 
home  consumers^^  Cotton  is  a  staple  product,  and  there 
is  in  this  country  a  special  institution  known  as  the  Cotton 
Exchange,  as  also  in  other  countries  that  use  cotton  in  large 
quantities  as  raw  material  for  the  making  of  cotton  goods. 
In  like  manner  there  is  a  Wheat  Exchange,  a  Petroleum 
Exchange,  a  Leather  Exchange,  and  so  on  throughout  the 
list  of  staple  goods.  In  the  case  of  wheat  and  cotton,  and 
of  some  of  the  more  important  staples,  special  buildings  or  ^ 
rooms  are  provided  in  the  larger  cities  where  each  day  those 
who  wish  to  buy  and  those  who  wish  to  sell  come  together. 

But  this  is  not  the  important  fact  respecting  these 
markets.  In  this  regard  these  Exchanges  do  not  differ 
from  a  vegetable  market  or  a  dry-goods  store.  (^The  im-  » 
portant  fact  is  that  a  purchase  or  a  sale  in  any  part  of  the  ^^-'^ 
country,  is  immediately  made  known  in  every  other  part 
of  the  country.^  Thus  the  hundreds  of  places  where  staples 
are  bought  and  sold  are  in  fact  but  parts  of  a  single  market. 
Every  price  is  quoted,  and  every  quotation  is  telegraphed, 
to  all  who  are*  interested.  London  and  Hamburg  know 
at  once  the  price  of  wheat  in  Chicago  or  of  cotton  in  New 
York  and  make  their  prices  accordingly;  or  it  may  be 
that  Chicago  and  New  York  make  their  prices  on  quota- 
tions from  London  and  Hamburg.  This  gives  a  good  idea 
of  what  is  meant  by  a  world's  market  as  compared  with 
a  local  market.  In  this  spread  of  information  do  we  find 
the  real  boundary  of  a  market. 


146  DESCRIPTION  OF  INDUSTRY 

(^Another  feature  of  this  market  for  staples  is  the  pro- 
vision made  for  the  jtoring.  of  goods.  )The  quantities  of 
these  products  to  be  handled  are  enormous.  The  average 
cotton  crop  in  this  country  is  about  15  million  bales;  the 
average  wheat  crop,  although  it  varies  from  year  to  year, 
is  not  far  from  1,000  million  bushels.  These  cannot  be 
sold  at  once  to  those  who  are  to  use  them.  The  manufac- 
turers and  the  exporters  cannot  handle  them  if  they  arrive 
in  too  large  quantities.  They  must  be  worked  ofif  grad- 
ually throughout  the  year;  but  at  the  same  time  the  supply 
must  be  ready  when  demanded  by  the  buyers.  To  meet 
this  requirement  there  has  grown  up  in  this  country  an 
extensive  system  of  elevators  and  warehouses  in  which 
goods  are  stored  awaiting  purchase.  Provisions  for  as- 
sembling and  storing  goods,  are  as  much  a  part  of  the 
machinery  of  the  market  as  is  the  counter  over  which 
dry  goods  are  sold  to  a  customer. 

The  process  of  dealing  in  staples,  of  which  wheat  ex- 
changes and  cotton  exchanges  are  examples,  has  much 
more  in  it  than  can  be  described  in  this  book;  but  enough 
has  been  said  to  make  clear  the  fact  that  the  staple  market 
is  an  essential  part  of  the  modern  market.  Dealers  in 
staples  are  middlemen  between  the  producers  and  the 
manufacturers,  or  between  the  manufacturers  who  con- 
fine themselves  to  different  steps  in  the  process  of  man- 
ufacturing a  completed  product. 

(f)  The  Stock  Market. — This  description  of  the  modern 
market  would  not  be  complete  without  mention  of  what  is 
known  as  the  stock  market.  A  stock  market  differs  from  a 
produce  market  in  that  it  deals  in  the  stocks  and  bonds  of  in- 
dustrial corporations  and  in  certain  kinds  of  national,  state, 
and  municipal  debts.     The  stock  market,  while  not  con- 


THE  MARKET  147 

fined  to  modern  times,  has  grown  to  such  enormous  propor- 
tions during  the  past  century,  that  its  development  may  be 
cited  as  a  decided  change  from  the  old  market  conditions. 

The  importance  of  large  industries  has  already  been 
explained,  and  it  goes  without  saying  that,  as  a  rule,  no 
individual  possesses  a  suflScient  amount  of  money  to  or- 
ganize a  great  industry.  The  money  of  a  large  number  of 
men  must  be  combined  in  order  to  get  sufficient  funds 
for  this  purpose.  What  is  known  as  the  stock  of  a  corpora- 
tion is  nothing  more  than  a  piece  of  paper  on  which  is 
written  the  fact  that  an  individual,  whose  name  appears 
on  the  paper,  has  contributed  a  certain  amount  of  money 
for  the  purpose  of  organizing  a  particular  industry.  The 
stockholders  taken  together  are  the  owners  of  the  business. 
When  one  buys  a  stock  certificate,  he  buys  a  share  in  the 
business.  If  any  profits  are  made,  this  stock  gives  him  the 
right  to  a  certain  portion  of  those  profits.  A  bond^  on 
the  other  hand,  is  nothing  more  than  a  promise  by  a  cor- 
poration to  return  an  amount  of  money  which  the  corpora- 
tion has  borrowed,  and  to  pay  a  certain  interest  each  year 
until  the  bond  itself  is  paid.  It,  like  the  stock  certificate, 
is  a  means  by  which  money  is  brought  together  for  the 
purpose  of  organizing  great  industries. 

If,  now,  great  industries  are  advantageous  (and  on  the 
whole  this  must  be  conceded),  the  stock  market,  which 
provides  a  means  for  selling  shares  in  these  great  industries 
to  individuals  who  have  saved  of  their  income  for  the  pur- 
pose of  making  investments,  renders  an  important  service 
to  the  community.  Dealers  in  stocks  are  middlemen 
just  like  the  retail,  the  wholesale,  and  the  staple  merchants. 
The  things  which  they  buy  and  sell  are  certificates  of 
ownership  in  corporations  or  certificates  of  indebtedness  of 


148  DESCRIPTION  OF  INDUSTRY 

corporations.  As  middlemen  they  stand  between  men 
who  wish  to  be  investors  and  men  who,  having  organized 
industries,  wish  to  sell  investments. 

It  was  said  that  a  peculiar  service  of  retail  and  whole- 
sale merchants  was  to  give  the  manufacturer  information 
as  to  the  kind  and  amount  of  goods  to  be  produced.  (In  a 
similar  way  it  is  a  peculiar  service  of  dealers  in  stocks  and 
bonds  to  gather  information  as  to  the  new  industries  that 
ought  to  be  established,] and  to  give  this  information  to 
investors  on  the  one  hand  and  to  promoters  on  the  other. 
Stockbrokers  have  a  bad  name,  and  many  of  them  de- 
serve it.  Temptations  to  dishonesty  in  this  business 
are  especially  strong,  and  the  law  has  not  yet  placed  stock 
brokerage  under  adequate  control;  but  this  should  not 
bUnd  us  to  the  fact  that  the  service  which  stockbrokers 
render,  is  an  important  service.  Without  adequate  pro- 
vision for  the  purchase  and  sale  of  securities,  large  manu- 
facturing and  transportation  enterprises  would  be  greatly 
embarrassed.  In  this  phase  of  the  subject,  the  modern 
market,  as  well  as  the  modern  world  of  business,  differs 
from  the  market  and  the  business  world  of  early  days. 

§  36.  The  Machinery  of  the  Market. — From  the  fore- 
going discussion  we  have  learned  the  kinds  of  services  ren- 
dered by  the  modern  market:  it  is  equally  important  that 
we  learn  something  of  the  machinery  of  which  the  market 
makes  use.    The  four  industrial  agencies  on  which  the  or- 
ganization and  practice  of  the  modern  market  depends  are: 
a  monetary  system, 
a  banking  system, 
organization  of  intelligence,  and 
/    steam  transportation. 
Each  of  these  will  receive  a  passing  comment. 


THE  MARKET  149 

(a)  A  Monetary  System. — The  modern  market  relies 
upon  a  well-developed  monetary  system.  To  make  clear 
the  importance  of  money,  it  is  only  necessary  to  explain 
the  inconvenience  of  exchanges  through  barter.  This 
form  of  exchange  is  nothing  more  than  a  trade.  One  boy 
has  two  knives  and  no  fishpole;  another  boy  has  two  fish- 
poles  and  no  knife;  and,  as  a  result,  a  trade  is  made,  and 
each  boy  is  satisfied.  This  is  an  illustration  of  what  is 
meant  by  exchange  through  barter. 

It  would  not  be  possible  for  specialization  in  production 
to  go  very  far,  if  it  were  necessary  that  the  surplus  of  each 
producer  should  be  exchanged  directly  for  the  surplus 
of  some  other  producer.  A  man  may  have  a  large  quantity 
of  things  which  he  desires  to  get  rid  of,  but  imless  he  can 
find  some  one  who  desires  his  product,  who  at  the  same 
time  has  something  which  he  himself  desires,  no  trading  is 
possible.  Under  such  conditions  ^ome  one  commodity 
that  is  desired  by  everybodyXis  a  necessity  for  quick  ex- 
changes, and  such  a  commodity  is  money.  Everyone  who 
has  anything  to  sell  will  sell  it  for  money,  because  he  knows 
that  with  money  in  his  possession  he  can  buy  whatever 
he  desires  to  buy.  So  important  is  money  as  a  part  of  the 
mechanism  of  exchange  that  it  is  recognized  as  the  corner 
stone  of  the  market.  More  will  be  said  on  this  point  in  a 
subsequent  chapter  which  deals  with  money. 

(b)  A  Banking  System. — The  topic  of  banking  Uke  that 
of  money  is  given  a  separate  chapter.  It  is  only  necessary 
at  this  point  to  show  that  banks  are  a  part  of  market 
machinery.  One  of  the  pecuUar  facts  of  the  modern  prac- 
tice in  buying  and  selUng  is,  that  business  men  seldom 
pay  cash  for  what  they  buy.  A  retail  grocer,  for  example, 
may  buy  goods  from  a  wholesaler,  and  give  in  payment 


150  DESCRIPTION  OF  INDUSTRY 

his  note  due  say  in  thirty  days.  It  may  be  that  the  whole- 
saler needs  the  cash.  This  he  can  obtain  by  selling  the 
note  of  the  grocer  to  a  bank  for  something  less  than  its 
face  value.  The  banker  waits  until  the  note  is  due,  and 
collects  the  full  amount.  The  point  is  this.  In  the  case  of  a 
large  share  of  commercial  transactions,  the  money  (or 
credit)  for  immediate  payment  to  the  seller  is  furnished 
by  some  bank.  The  market  could  not  be  carried  on  with- 
out the  machinery  for  exchanges  which  banks  supply. 

(c)  Organization  of  Intelligence. — A  third  feature  of  a 
well-developed  market  is  the  machinery  (tor  collecting 
and  giving  out  informationA  Many  means  have  been 
devised  for  making  known  current  facts  respecting  supply 
and  demand,  sale  and  purchase,  prices,  and  the  like.  The 
service  rendered  by  the  advertising  pages  of  papers  and 
magazines  is  a  means  of  bringing  buyers  and  sellers  to- 
gether. The  column  containing  "wantads.,"  for  example, 
is  a  phase  of  the  organized  market.  Reference  has  al- 
ready been  made  to  quotations  of  prices  in^cujrent  news- 
papers,  and  to  the  immediate  transmission  by  telegraph 
of  any  information  which  bears  upon  what  is  known  as  the 
movements  of  the  market.  These  references  do  not,  how- 
ever, give  an  adequate  idea  of  the  machinery  which  ex- 
ists for  collecting  necessary  information.  Besides  general 
quotations  in  current  papers,  every  important  branch  of 
business  has  its  own  trade  paper,  and  the  success  or  failure 
of  such  a  paper  depends  upon  the  accuracy  and  complete- 
ness of  the  information  which  it  publishes  relative  to  the 
probable  demand  and  probable  supply  of  the  particular 
line  of  goods  with  which  it  is  concerned.  There  are  over 
thirty;:^ve  hundred^trade  papers  in  the  United  States. 

Other  agencies  for  making  information  available  for 


THE  MARKET  151 

the  buyer  and  the  seller  are  Boards_of  Trade  and  Cham- 
bers 01  Commerce  which  exist  in  one  form  or  another  in 
every  town  of  any  importance  as  a  manufacturing  or 
jobbing  center.  These,  too,  are  a  part  of  the  machinery 
of  the  modern  market.  The  statistics  which  they  collect 
and  publish  have  to  do  with  traffic,  with  sales,  with  op- 
portunities for  building  new  factories,  and  indeed  with 
anything  that  has  to  do  with  the  commercial  importance 
or  growth  of  the  town. 

Of  such  great  importance  is  accurate  information  re- 
garded that,  in  the  case  of  certain  staple  commodities, 
the  government  has  found  it  necessary  to  collect  and 
publish  current  information  respecting  growing  crops. 
Thus,  the  (J)epartment  of  Agriculture  in  Washington 
has  reports  from  agents  all  over  the  United  States/which 
show  almost  daily  the  condition  of  the  cotton  crop,  the 
wheat  crop,  the  corn  crop,  and  the  like.  Manufacturers 
are  not  obliged,  therefore,  to  depend  exclusively  upon  the 
increase  or  decrease  of  orders  placed  by  wholesale  dealers 
for  determining  the  amount  of  goods  to  be  produced; 
nor  are  those  middlemen  who  deal  in  staples  obliged  to 
rely  upon  information  privately  collected,  to  know  what 
will  likely  be  a  fair  price  to  be  offered  for  staple  com- 
modities. Congress  has  also  thought  it  wise  to  spend 
enormous  sums  of  money  in  the  collection  and  publication 
of  industrial  information,  as  for  example  the  reports  of 
the  Census  Office  and  the  Statistical  Abstracts  published 
by  the  Treasury  Department.  These  agencies  of  govern- 
ment, organized  to  investigate  industrial  conditions  and 
to  collect  and  publish  freely  information  respecting  the 
probable  harvest  of  staple  goods,  are  an  essential  part 
of  the  machinery  of  the  modern  market.    The  consumer  is 


152  DESCRIPTION  OF  INDUSTRY 

especially  interested  in  having  this  work  done  well,  for 
then  only  can  he  rely  upon  the  market  price  as  Ueing  a 
fair  price. 

(d)  Machinery  of  TransyorMjon. — A  perfect  market 
requires,  further,  an  adequate  development  of  the  machin- 
ery of  transportation.  It  would  be  useless  to  know  that 
there  is  a  surplus  of  a  certain  kind  of  goods  in  one  part 
of  the  country  and  a  deficit  in  another,  if  these  two  terri- 
tories were  not  connected  with  well-equipped  highways  of 
commerce.  A  flexible  market  requires  some  means  for 
carrying  goods  quickly  and  cheaply  from  one  locality  to 
another.  The  means  of  transportation  must  be  swift,  or 
the  merchant  who  has  decided  to  ship  goods  may  find 
the  market  supplied  before  his  goods  have  arrived.  The 
cost  of  transportation  must  be  low,  or  he  will  find  that  he 
cannot  afford  to  bring  goods  from  a  distant  market.  The 
machinery  of  modem  transportation  has  already  been 
described.  It  must  now  be  evident  that  the  railways  of 
the  country,  the  express  companies,  the  telegraph  com- 
panies, the  postal  department  of  the  government,  indeed 
all  the  agencies  of  modem  transportation,  find  their 
proper  interpretation  in  the  role  they  play  as  a  part  of 
the  machinery  of  the  modem  market. 

The  elements  which  make  possible  the  modem  market, 
then,  are:  a  well-established  monetary  system,  an  effective 
organization  for  the  collection  of  information,  and  a  swift 
and  cheap  method  of  transportation. 

§  37.  The  Market  and  the  Productive  Process. — Thus 
far  the  market  has  been  considered  primarily  as  a  means 
of  distributing  goods  to  consumers,  but  its  service  to  the 
process  of  production  is  equally  important.  Compara- 
tively few  of  the  products  offered  for  sale  are  made  by  a 


THE  MARKET  153 

single  business  firm  or  corporation.  What  one  firm  makes 
is  sold  to  another  firm,  which  changes  its  form  by  further 
work,  and  sells  to  a  firm  that  stands  third  in  the  process 
of  production,  and  so  on  until  the  last  step  is  taken  in 
the  making  of  the  finished  product.  It  is  this  specializa- 
tion that  makes  for  efiiciency  in  production,  and  such  spe- 
cialization would  not  be  possible  were  it  not  for  a  broad 
and  well-organized  market. 

Strictly  speaking,  the  only  raw  material  is  the  product 
of  the  extractive  industries,  that  is  to  say:  the  wheat,  the 
cotton,  the  wool,  the  ores,  and  the  like.  This,  however, 
is  not  the  common  use  made  of  that  phrase.  (^Specializa- 
tion in  production  has  been  carried  so  far,  that  what  is 
the  product  of  one  factory  is  the  raw  material  of  an- 
other, j  Thus,  the  iron  ore  and  limestone  are  furnished 
by  the  mine  and  the  quarry  to  the  smelter  for  making 
pig  iron;  the  pig  iron  by  treatment  in  a  blast  furnace 
is  turned  into  steel,  which,  carried  through  the  mills 
comes  out  as  wire,  rods,  plates,  and  the  like.  These 
forms  of  steel,  combined  with  manufactured  woods,  pre- 
pared oils  and  paints,  appear  as  a  plow,  a  sled,  a  freight 
car,  or  any  one  of  a  thousand  finished  manufactured 
products.  These  are  illustrations  of  specialized  processes, 
and  commonly  each  step  in  the  process  means  a  purchase 
and  a  sale. 

So  far  has  specialization  in  manufacturing  gone,  that 
a  large  number  of  business  firms  called  factories  are  little 
more  than^  pIaces_to  set  iig^  parts  made  by  other  factories. 
Many  automobile  factories,  for  example,  buy  the  wheels, 
the  tires,  the  tops,  the  frames,  the  engines,  the  wind 
shields,  the  starters,  the  horns,  and  practically  everything 
that  goes  into  an  automobile.    All  of  these  parts  may  be 


154  DESCRIPTION  OF  INDUSTRY 

made  by  separate  firms,  and  all  the  so-called  manufacturer 
of  the  automobile  does  is  to  assemble  the  parts,  set  them 
up,  and  give  the  machine  a  coat  of  paint  and  a  name. 

The  bearing  of  organized  specialization  to  the  market 
is  evident.  Not  only  is  the  market  a  place  where  consumers 
buy  the  finished  product,  but  it  is  the  place  where  manu- 
facturers, at  every  step  in  the  making  of  the  finished 
product,  buy  what  they  call  raw  material  from  other 
manufacturers.  The  same  bit  of  wood,  or  iron,  or  cotton, 
or  paint,  may  appear  many  times  on  the  market,  but 
each  time  in  a  different  form,  being  one  step  added  to- 
wards the  completed  product.  It  is  the  market  that  holds 
the  center  of  the  industrial  field,  and  gives  to  business, 
however  speciaHzed,  its  imity  of  purpose.  It  is  through 
the  development  of  the  market  that  the  business  world 
attains  productive  organization  and  co-operative  work. 
(The  important  inference  from  the  foregoing  is  that 
specialization  in  production  is  limited  by  the  extent  of 
the  market?)  The  manufacture  of  a  commodity  might  be 
divided  into  twenty  separate  steps  if  the  amount  that 
can  be  sold  is  large  enough  to  warrant  such  minute  spe- 
cialization: if,  however,  the  commodity  must  be  sold  on 
a  restricted  local  market,  so  extensive  an  application  of 
the  principle  of  division  of  labor  would  be  unprofitable. 
The  reason  for  this  may  be  easily  stated.  Efficiency  in 
production  requires  that  the  capital  and  skill  needed 
for  each  step  be  utilized  to  their  full  capacity.  To  fail  to 
do  this  means  idle  capital  and  the  loss  that  follows  the 
transfer  of  workers  from  one  line  of  work  to  another. 
Moreover,  the  product  of  each  step  must  be  combined 
with  the  products  of  all  the  other  steps  in  order  to  pro- 
duce the  finished  article,  and  anything  left  over,  anywhere 


THE  MARKET  155 

along  the  line,  is  a  loss.  A  third  fact  to  be  held  in  mind 
is  that  these  steps  are  not  uniform  in  the  amount  of  capital 
and  work  required.  Some  may  call  for  one  x  capital: 
others  may  call  for  ten  x  capital.  In  order  to  warrant 
an  organization  which  includes  the  shortest  step,  as  a 
separate  process,  the  amount  of  the  completed  product 
must  be  sufficiently  great  to  keep  the  machinery  used  by 
this  shortest  step  occupied  without  interruption.  This 
explains  why  a  broad  market  is  essential  for  industrial 
progress.  Tit  explains  what  is  meant  by  the  saying  that 
the  market  limits  industry .y 

The  most  far  reaching  single  fact,  that  which  gives  char- 
acter to  an  industrial  society,  is  the  extent  of  its  market 
and  the  manner  in  which  that  market  is  organized  and 
controlled. 


CHAPTER  IX 
THE  LAWS  OF  PRICE 

"The  actual  price  at  which  any  commodity  is  commonly  sold  is 
called  its  market  price.  It  may  either  be  above,  or  below  or  exactly 
the  same  with  its  natural  price." — Adam  Smith. 

The  fact  of  price  is  the  most  universal  fact  in  the  mod- 
ern business  world.  Its  influence  on  production  and  con- 
sumption is  forced  on  our  attention  by  every  market 
transaction  that  takes  place.  For  this  reason,  some 
knowledge  of  the  considerations  that  control  the  setting 
of  prices  is  essential  for  one  who  desires  to  understand 
how  modern  industry  is  carried  on.  This  chapter  is  de- 
voted to  an  analysis  of  the  laws  of  price. 

§  38.  Statement  of  the  Question. — Price  may  be  de- 
fined as  the  measurement  in  money  of  the  market  value 
of  things  that  are  bought  and  sold.  This,  however,  is  a 
superficial  definition,  and  fails  to  disclose  the  real  ques- 
tion that  we  wish  to  have  answered.  From  the  foregoing 
chapter,  we  learn  that  all  goods,  except  those  few  which 
are  directly  consumed  by  the  producer,  appear  on  the 
market  in  purchase  and  sale.  Each  transaction  is  at  a 
given  price.  The  wheat  sold  is  so  much  per  bushel;  cloth, 
so  much  per  yard;  agricultural  machinery,  so  much  per 
unit;  and  so  on  through  the  hst.  There  is  a  specific  price 
for  every  purchase  and  sale. 

The  important  thing  in  a  study  of  prices,  therefore,  is 
the  price  at  which  any  particular  kind  of  goods  can  be 
sold  as  compared  with  the  prices  of  other  goods.     The 

158 


THE  LAWS  OF  PRICE  157 

market  is  a  place  in  which  goods  are  exchanged,  and  it 
is  evident  that  the  amount  of  satisfaction  which  one 
gains  from  his  work  is  dependent  quite  as  much  upon 
the  price  which  he  must  pay  for  what  he  desires  to  con- 
sume as  upon  the  price  he  gets  for  what  he  has  produced. 
The  fact  that  prices  are  quoted  in  money  has  nothing  to 
do  with  the  case,  for  the  influence  which  money  exerts 
is  common  to  all  prices.  What  we  wish  to  learn,  in  our 
search  for  the  laws  of  price,  is  the  rules  or  principles  which 
determine  the  quantity  of  one  kind  of  goods  that  will 
exchange  for  a  given  quantity  of  another  kind  of  goods. 
The  laws  of  price  are  in  fact  the  laws  of  market  exchanges. 

An  analysis  of  the  laws  of  price  is  not  altogether  easy. 
The  reasoning  involved  must  be  carried  in  mind  from  the 
beginning  to  the  end.  One  must  distinguish,  at  the  out- 
set, between  normal  prices  and  the  various  kinds  of 
monopoly  prices.  The  order  of  analysis  here  submitted 
takes  up  first  the  process  of  price  making  under  condi- 
tions of  free  competition,  which  is  assumed  to  be  the  nor- 
mal condition  for  a  people  that  aims  to  realize  industrial 
freedom.  The  law  of  normal  prices  having  been  stated, 
the  conditions  that  give  rise  to  speculative  prices  and 
monopoly  prices  will  then  be  considered.  The  law  of 
normal  prices,  on  its  part,  will  be  considered  under  the 
following  questions: 

What  determines  the  price  of  goods  already  produced 
and  ofifered  for  sale,  free  competition  being  assumed 
between  consumers  for  purchase,  and  between  merchants 
for  sale? 

What  effect  will  the  market  price  of  goods  sold  have 
on  the  production  of  more  goods  of  the  same  sort,  free 
competition  being  assumed  between  producers? 


158  DESCRIPTION  OF  INDUSTRY 

What  re-statement  of  the  law  of  normal  price  is  nec- 
essary to  adjust  it  to  the  peculiar  conditions  under  which 
agricultural  goods,  manufacturing  goods,  and  trans- 
portation services  are  produced,  free  competition  being 
assumed  for  all  producers? 

If  these  three  questions  can  be  answered,  we  shall  know 
what  makes  prices  and  price  movements;  and,  what  per- 
haps is  of  equal  importance,  we  shall  be  able  to  see  yet 
more  clearly  the  role  played  by  the  market  and  market 
prices  in  the  control  of  industrial  affairs  through  com- 
petition. 

§  39.  The  Market  Price.-£ln  the  discussion  of  current 
market  prices,  it  is  necessary  to  exclude  every  considera- 
tion of  production. )  A  definite  amount  of  goods  of  va- 
rious sorts  is  offered  for  sale.  The  amount  of  wages  that 
have  been  paid  for  the  production  of  these  goods,  the 
amount  paid  for  the  material  used,  and  the  amount  of 
machinery  worn  out  in  their  making,  have  nothing  to 
do  with  the  determination  of  the  prices  at  which  goods 
already  on  the  market  will  be  bought  and  sold.  "Labor 
once  expended  has  no  further  influence  on  value."  It 
is  true  that  current  prices  do  have  an  influence  on  future 
production,  and  this  fact  must  be  considered  before 
we  can  define  the  law  of  normal  price;  but  the  first  step 
in  explaining  this  law  is  to  find  out  what  makes  the  cur- 
rent or  market  price.  Let  us  try  to  keep  these  two  things 
separate  or  our  reasoning  will  surely  get  into  a  tangle. 

(a)  The  Purpose  of  Price. — Some  light  will  be  thrown 
on  the  question  of  how  market  prices  are  adjusted,  if 
we  ask/ what  the  price  set  up  for  any  particular  class  of 
goods  is  supposed  to  accomplish.  J  The  answer  is  simple. 
The  correct  price  for  any  class  of  goods  must  ensure  the 


THE  LAWS  OF  PRICE  159 

sale  of  those  goods.  If  the  price  is  too  high,  the  goods 
cannot  be  sold,  and  the  merchant  who  offers  them  for 
sale  will  be  bankrupt.  If,  on  the  other  hand,  the  price 
is  too  low,  the  merchant  will  find  that  he  has  not  enough 
goods  on  hand  to  supply  those  who  seek  to  buy.  In 
either  case,  he  will  change  the  price.  If  he  finds  that 
sales  are  slow  and  he  fears  to  be  left  with  a  stock  of  un- 
sold goods  on  hand,  he  will  lower  the  price  so  as  to  stim- 
ulate sales;  if  he  finds  sales  are  brisk,  and  that  he  is  likely 
to  sell  all  he  has  on  hand  before  consumers  stop  buying, 
he  will  raise  the  price.  By  this  constant  shifting  of  the 
price  to  adjust  sales  to  market  conditions,  the  merchant 
finally  hits  on  a  price  that  will  clear  out  his  goods  on  hand 
and  give  to  buyers  all  of  his  goods  that  they  want  at  the 
price.  This  is  the  process  by  which  the  market  price 
is  set  up. 

(b)  Dqnand  and  Supply. — It  is  usual  in  explaining 
the  law  of  price  to  make  use  of  the  words  "demand" 
and  "supply."  rThe  law  is  then  stated  as  follows:  The 
market  price  of  any  commodity  will  settle  at  that  point 
which  makes  the  demand  for  it  equal  to  the  supply  of  it.  ) 
The,.supply_is^fixec|.  It  is  a  certain  amount  of  a  specific 
thing  which  at  a  particular  time  is  offered  for  sale, — so 
many  millions  of  bushels  of  wheat,  or  tons  of  beef,  or 
yards  of  calico,  or  cases  of  shoes,  or  gallons  of  milk.  The 
demand,  however^_is_jiQt-fixfidL__It  fluctuates  with  the 
price,  becoming  greater  as  the  price  falls  and  smaller  as 
the  price  rises.  Price  is  something  like  the  movable 
weight  on  a  pair  of  scales  which,  by  being  moved  to  the 
right  or  the  left,  finally  establishes  a  balance. 

But  how,  it  may  be  asked,  does  the  change  in  the  price 
change  the  quantity  of  goods  demanded?     To  explain 


160  DESCRIPTION  OF  INDUSTRY 

this,  we  must  learn  what  is  meant  by  demand.  Market 
demand  is  not  merely  the  desire  of  consumers  for  goods. 
There  must,  of  course,  be  this  desire,  but  that  is  not  all 
there  is  to  demand.  The  only  demand  which  has  any 
influence  on  the  market  is  the  demand  of  those  con- 
sumers who  have  money  with  which  to  buy.  This  is 
called  the  effective  demand-  It  is  the  demand  which  has 
an  effect  upon  the  price.  The  merchant  cares  nothing 
for  the  trade  of  people  who  have  no  money. 

But  it  is  not  the  simple  fact  that  customers  have  money 
which  measures  the  effective  demand  for  any  line  of 
goods.  It  is  rather  the  amount  of  money  they  can  be 
induced  to  spend  for  the  particular  goods  that  are  offered 
for  sale.  Every  purchaser  has  an  hundred  ways  in  which 
he  can  spend  his  money,  and  the  kind  of  goods  he  is 
willing  to  buy  depends  largely  on  their  price  as  compared 
with  the  price  of  other  goods  offered  for  sale. 

We  may,  perhaps,  put  it  in  this  way.  The  buyer  has 
a  certain  amount  of  money  to  spend,  and  he  desires  to 
spend  it  so  as  to  secure  the  highest  possible  satisfaction. 
If  shoes  are  high  as  compared  with  meat,  he  will  have  his 
old  shoes  mended  and  buy  more  meat.  That  is  to  say, 
he  will  subtract  $7.00,  the  price  of  a  new  pair  of  shoes, 
from  the  demand  circle  for  new  shoes  and  add  it  to  the 
demand  circle  for  meat.  Suppose  thousands  of  men  who 
desire  new  shoes  act  in  the  same  way.  The  shoe  merchant 
will  feel  the  decrease  in  the  "effective  demand"  for  shoes, 
and  the  meat  merchant  will  feel  the  increase  in  the  "effect- 
ive demand"  for  meats.  The  former  will  reduce  the  price 
for  shoes  so  as  to  get  back  his  customers,  and  the  latter 
will  raise  the  price  of  meats,  since  otherwise  he  will  be 
sold  out  before  the  "effective  demand"  for  meat  has  been 


THE  LAWS  OF  PRICE  161 

satisfied.  This  illustration  shows  how  a  change  in  price 
tends  to  result  in  a  change  in  demand. 

Supply  is  at  any  particular  time  a  fixed  amount,  but 
through  the  change  in  the  price  asked,  the  demand  may  be 
increased  or  decreased  until  the  demand  is  adjusted 
to  the  supply.  That  is  to  say,  the  price  tends  to  settle 
at  a  point  which  will  result  in  the  sale  of  the  goods.  When 
we  come  to  consider  production  in  its  relation  to  price, 
we  shall  see  that  supply  is  the  changing  factor  in  the  equa- 
tion :(but  for  goods  already  produced  and  thrown  on  the 
market  for  sale,  the  changing  factor  is  the  amount  of  goods 
that  will  be  demanded  at  different  prices,  j 

(c)  TkeCompetition  of  Goods. — The  foregoing  para- 
graph makes  clear  the  nature  of  the  competition  between 
sellers.  It  shows  that  merchants  must  fix  a  price  that  will 
dispose  of  their  goods,  and  that  they  desire  to  fix  a  price 
that  will  give  them  the  highest  possible  profit.  There  is 
nothing  new  in  this  line  of  reasoning,  but  an  added  con- 
sideration may  be  submitted  respecting  it. 

Besides  the  competition  between  sellers,  there  is  com- 
petition on  the  part  of  buyers,  but  of  an  entirely  different 
sort.  With  them,  it  is  not  so  much  a  competition  of  buyer 
against  buyer  for  the  purchase  of  a  particular  kind  of 
goods,  as  it  is  a  question  of  what  kind  of  goods  they  shall 
buy  with  the  money  in  hand.  /The  peculiar  service  of  this 
sort  of  competition  is  to  steady  the  market  and  equalize 
prices  as  between  different  things  offered  for  sale.^  An  il- 
lustration of  what  is  meant  by  the  phrase  "  competition  of 
goods  "  will  make  this  clear. 

Suppose  the  amount  of  money  to  be  spent  for  meats,  for 
clothing,  for  schooling,  for  theatres,  and  the  Uke,  has 
somehow  been  settled,  and  that  something  has  happened 


162  DESCRIPTION  OF  INDUSTRY 

to  reduce  the  usual  supply  of  mutton.  This  will  not  nec- 
essarily result  in  an  extravagant  rise  in  the  price  of  mut- 
ton. There  are  other  kinds  of  meats  which  consumers 
may  buy,  and  part  of  the  usual  consumption  of  mutton 
will  be  transferred  to  beef,  or  to  pork.  Thus,  the  threat- 
ened rise  in  the  price  of  mutton  will  be  checked.  Its 
price  will  go  up  some;  so  will  that  of  beef  and  pork;  but 
the  market  price  of  mutton  alone  will  not  show  the  full 
effect  of  a  shortage  in  the  mutton  supply.  It  will  be  spread 
over  all  kinds  of  goods  that  belong  to  the  meat  class. 
This  is  what  is  called  the  competition  of  goods,  and  this 
illustration  shows  how  such  competition  tends  to  steady 
prices  on  an  established  market. 

The  lesson  of  this  illustration  may  be  made  general. 
The  amount  of  money  brought  to  the  market  for  the  pur- 
chase of  goods  is,  at  any  particular  time,  a  fixed  amount. 
Those  who  have  this  money  are  influenced  by  a  desire  to 
satisfy  many  and  varied  wants.  They  cannot  all  be  satis- 
fied, and  the  consumer  must  choose  which  wants,  in  view 
of  the  prices  that  must  be  paid,  are  the  more  pressing. 
Probably  no  one  ever  makes  a  purchase  without  thinking 
how  he  might  have  spent  his  money  differently.  This 
state  of  mind  makes  a  competition  between  the  different 
kinds  and  sorts  of  goods,  which  tends  to  check  what 
otherwise  might  be  excessive  rises  in  the  price  of  particular 
goods,  and  to  steady  the  movement  in  the  market  price  of 
all  goods.  ( It  thus  appears  that  the  competition  that 
works  through  the  buyer  is  a  different  thing  from  that 
which  works  through  the  seller  J  The  former  is  a  compe- 
tition that  rests  on  the  desire  to  secure  the  largest  amount 
of  satisfaction  for  the  expenditure  of  a  given  amount  of 
money;  the  latter  rests  on  a  desire  to  make  the  highest 


THE  LAWS  OF  PRICE  163 

profit  possible  from  the  sale  of  a  given  amount  of  goods. 
Both  are  present  in  the  process  of  making  market  prices. 

(d)  The  Effect  of  Different  Sfnndards  of  Living^. — Still 
another  fact  claims  attention.  The  foregoing  presentation 
of  the  law  of  prices  seems  to  imply  that  all  buyers  have 
about  the  same  amount  of  money  to  spend.  This  is  not 
true.  The  market  opens  its  doors  to  bank  clerks  at  $50 
a  month,  and  bank  presidents  at  $50,000  a  year.  It  offers 
goods  for  sale  to  laborers  whose  wages  are  just  above  the 
starvation  point,  and  workers  who  receive  what  the  la- 
borers call  a  fat  salary.  With  the  justice  of  this  situation 
we  have  nothing  to  say.  Our  task  is  to  describe  things 
as  they  are,  and  it  is  a  fact  of  common  observation  that 
the  buyers  on  the  market  show  a  very  unequal  distribu- 
tion of  the  money  devoted  to  the  purchase  of  goods.  Does 
this  fact  lead  us  to  modify  our  statement  of  the  law  of 
market  price? 

This  question  must  be  answered  in  the  negative.  The 
law  of  market  price  covers  all  grades  of  goods  and  all 
classes  of  buyers;  but  the  difference  in  the  amount  of  money 
which  different  classes  of  buyers  bring  to  the  market  has  con- 
siderable influence  on  the  manner  in  which  that  law  works. 

It  is  necessary  to  hold  in  mind  all  that  was  said  in  Chap- 
ter VI  of  the  broad  range  of  economic  wants.  They  ex- 
tend from  the  bare  necessaries  of  animal  existence  to  the 
most  expensive  forms  of  extravagant  living.  The  market 
undertakes  to  supply  the  goods  called  for  at  each  step  of 
the  growth  of  economic  desires,  but  at  each  step  the  number 
of  men  who  have  a  sufficient  amount  of  money  to  be  buyers 
is  reduced.  At  the  bottom  of  the  pyramid  of  wants, 
we  have  all  men  as  buyers;  at  the  top,  the  number  is  so 
few  that  they  make  a  class  by  themselves. 


164  DESCRIPTION  OF  INDUSTRY 

It  is  not  quite  right,  therefore,  to  think  of  buyers  and 
sellers  as  such,  as  though  all  the  buyers  and  all  the  sellers 
made  a  single  market.  On  the  contrary,  so  far  as  the  law 
of  price  is  concerned,  there  are  as  many  markets  as  there 
are  grades  of  buyers  and  sellers,  and  the  price  of  the  goods 
offered  for  each  grade  of  consumers  will  be  fixed  by  the 
estimates  which  this  class  of  consumers  places  on  the 
goods.  For  example,  the  fact  that  a  very  rich  man  may 
eat  potatoes  has  no  effect,  so  far  as  buyers'  competition 
is  concerned,  on  the  price  of  potatoes.  He  would  buy 
them  whatever  their  price.  The  seller  counts  him  as  a 
sure  customer,  and  his  demand  as  a  stable  demand.  /  The 
limit  placed  on  the  rise  in  the  price  of  potatoes  is  made 
by  consumers  who  will  cease  to  eat  potatoes  if  the  price 
goes  too  high^  This  illustration  is  of  general  appUcation. 
It  shows  that  the  consumers  whose  consumption  is  con- 
fined to  the  goods  produced  for  different  standards  of 
living,  are  the  buyers  whose  demand  is  subject  to  change 
by  a  variation  in  price,  and  consequently  whose  demand 
controls  the  price.  Many  errors  have  arisen  in  the  dis- 
cussion of  prices  by  not  remembering  this  fact. 

§  40.  Normal  Price. — ^We  have  learned  the  law  of  mar- 
ket price;  we  now  turn  to  a  study  of  the  law  of  normal  price. 
The  former  pertains  to  the  price  at  which  goods  offered 
for  sale  will  be  sold :  the  latter  to  the  price  at  which  more 
goods  will  be  produced  for  sale.  The  task  of  the  market 
price  is  to  clear  the  market  of  goods  already  produced: 
the  task  of  the  normal  price  is  to  secure  for  the  market  a 
constant  replacement  of  the  goods  sold.  A  study  of  normal 
prices  is  in  fact  a  study  of  the  influence  of  current  prices 
on  future  production. 

It  is  not  difficult  to  trace  this  influence,  if  we  hold  in 


THE  LAWS  OF  PRICE  165 

mind  that  all  goods  are  made  to  be  sold,  and  that  they  will 
continue  to  be  made  as  long  as  they  can  be  sold  at  a  profit. 
The  first  point,  therefore,  in  a  definition  of  normal  price 
is  that  it  is  a  price  th«t  gives  a.  profit  to  the  producer  and 
the  merchant.  This  means  that  the  price  at  which  goods 
are  sold,  provided  their  production  and  sale  is  to  continue 
from  year  to  year,  must  cover  their  cost.  (^The  normal 
price  of  any  line  of  goods  tends  to  conform  to  the  cost  of 
their  production.! 

This  point  may  be  readily  illustrated,  so  far  at  least  as 
to  show  how  the  commercial  forces  work  that  produce 
this  result.  Suppose  one  million  pairs  of  skates  to  have 
been  manufactured  and  offered  for  sale.  These  skates 
cost  $.90  a  pair  to  make.  They  must  be  sold  at  $1.50  a 
pair  to  give  the  manufacturer  a  profit  on  making,  to  cover 
the  cost  of  sale,  and  to  give  the  merchant  a  profit  for 
handling.  But  suppose,  for  some  reason,  merchants 
cannot  sell  a  milUon  pairs  of  skates  at  $1.50  a  pair.  That 
is  to  say,  the  market  is  over  supplied  with  skates  at  that 
price.  One  of  two  things  will  happen.  Either  the  mer- 
chants will  carry  over  their  stock  of  unsold  skates,  hoping 
to  find  sale  for  them  the  next  winter,  or  they  will  reduce 
the  price  say  to  $1.25  a  pair,  in  order  to  attract  more 
buyers.  In  either  case,  the  manufacturer  must  readjust 
his  program  of  production.  If  the  merchants  carry  over 
a  part  of  their  stock,  holding  to  the  price  of  $1.50  a  pair, 
the  manufacturer  cannot  sell  them  as  many  pairs  of  skates 
next  winter  as  he  sold  this  winter,  and  he  will  be  obhged 
to  reduce  the  number  made  for  the  next  year's  market. 
If,  on  the  other  hand,  the  merchants  clear  their  stock  by 
reducing  the  price,  the  manufacturer  must  ask  himself 
whether  or  not  he  is  willing  to  make  as  many  skates  as 


166  DESCRIPTION  OF  INDUSTRY 

he  made  before  if  they  must  be  sold  by  the  retail  dealer 
at  $1.25  a  pair.  If  he  has  already  reduced  the  cost  of 
manufacture  to  the  lowest  point  possible,  and  if  the  profit 
he  is  making  is  not  excessive  profit,  he  will  be  obliged  to 
maintain  $1.50  as  the  market  price  for  skates.  To  do 
this,  he  must  reduce  the  output  and  so  reduce  the  supply 
offered  for  sale. 

The  converse  of  this  illustration  need  not  be  stated  in 
full.  It  will  be  suggested  by  assuming  that  the  million 
pairs  of  skates  are  sold  at  $1.50  a  pair,  but  that  the  de- 
mand for  skates  at  that  price  is  not  supplied.  Retail 
dealers  all  over  the  country  will  telegraph  the  manufac- 
turer for  more  skates.  These  orders  the  manufacturer 
cannot  fill.  It  takes  time  to  make  skates  and  the  season 
for  their  sale  is  short.  But  this  market  demand  for  skates 
in  excess  of  what  the  manufacturer  estimated  the  demand 
would  be,  leads  manufacturers  to  change  their  program. 
They  will  produce  a  million  and  a  quarter  pairs  of  skates 
for  next  year's  market. 

From  these  illustrations  (and  they  apply  to  all  kinds  of 
goods  produced  under  conditions  of  open  competition), 
it  is  clear  that  the  market  price,  in  the  long  run,  will  tend 
to  conform  to  the  cost  of  production  and  sale.  rThis  is 
the  cost  price,  and  the  cost  price  is  the  normal  price.) 

A  second  point  must  be  added  to  show  that  the  cost 
price  is  the  normal  price  in  the  sense  that  it  is  the  fair 
price.  (Under  a  condition  of  industrial  freedom,  workers 
and  investors  can  select  any  line  of  production  they  see 
fit.y  Since  the  motive  that  guides  production  is  the  desire 
to  secure  profit  through  sale,  it  follows  that  new  workers 
and  new  capitalists  will  be  drawn  to  the  production  of 
those  things  that  show  a  profit  above  the  average.    This 


THE  LAWS  OF  PRICE  167 

will  increase  the  supply  on  the  market  and  reduce  the 
market  price  until  the  profit  in  these  industries  is  reduced 
to  the  average  rate- of  profit.  On  the  other  hand,  indus- 
tries that  produce  goods  that  sell  on  the  market  for  a 
price  that  gives  a  profit  below  the  average,  will  curtail 
their  output,  and  as  a  result  the  market  price  will  be 
raised  until  such  industries  give  the  average  profit. 

The  tendency  in  a  free  market  is  for  all  industries  to 
secure  a  price  for  their  products  which  will  give  about 
the  same  rate  of  profit,  and  for  all  goods  of  all  kinds  and 
sorts  to  exchange  on  the  basis  of  their  cost  price.  This 
is  said  to  be  a  fair  basis  of  exchange,  because  every  pro- 
ducer is  a  consumer,  and  every  consumer  a  producer. 
It  means  that  every  man  sells  what  he  makes  for  what  it 
costs  him  to  make  it,  profit  included,  and  that  every 
man  buys  from  others  what  they  make  at  the  cost  to 
them  of  its  production  and  sale.  It  means  that  goods  of 
all  kinds  will  be  exchanged  on  the  market  on  the  cost 
basis.  A  free  market,  including  under  that  phrase  the 
process  of  production  as  well  as  of  sale,  is  a  guarantee 
that  what  we  pay  for  goods  will  be  a  fair  price.  This  is 
why  monopoly,  which  may  be  defined  as  a  condition  of 
production  and  sale  not  under  the  control  of  competition, 
is  such  an  abominable  affair.  It  destroys  this  guarantee 
that  the  price  paid  for  goods  on  the  market  will  be  a  fair 
price. 

It  seems  from  the  foregoing,  that  the  law  of  market 
price  and  the  law  of  normal  price  are  two  sides  of  a  single 
process.  The  market  price  has  to  do  with  the  relation  of 
demand  to  supply  of  those  goods  which  at  any  particular 
time  are  offered  for  sale.  It  changes  in  response  to 
"effective  demand."     The  normal  price,  on  the  other 


168  DESCRIPTION  OF  INDUSTRY 

hand,  has  to  do  with  production  for  the  future.  It  changes 
in  response  to  the  rate  of  profit  that  is  gained  from  sales 
at  the  market  price,  and  tends  always"  to  cover  the  cost  of 
production,  no  more  and  no  less. 

It  is  not  quite  accurate,  however,  to  reason  about  pro- 
duction and  consumption  as  though  they  were  separate 
processes.  The  true  description  is  that  they  form  a 
single  continuous  process.  New  goods  are  placed  on  sale 
daily,  and  daily  the  consumer  buys.  The  process  of 
production  could  not  long  continue  unless  it  were  bal- 
anced by  the  process  of  consumption.  A  steady  and  con- 
tinuous market  is  one  in  which  the  average  daily  pur- 
chases equal  the  daily  production.  The  opportunity  is 
thus  given  for  the  market  price  and  the  cost  price  to 
work  together  in  the  establishment  of  a  general  scheme 
of  prices  which  are  recognized  as  normal  prices  by  all  pro- 
ducers and  all  consumers.  TThe  law  of  normal  price  is 
that  it  tends  to  the  cost  of  production  for  all  goods  pro- 
duced under  conditions  of  free  competition^ 

§  41.  Monopoly  Price. — ^The  normal  price  is  the  com- 
petitive price;  the  monopoly  price,  by  contrast,  is  a 
price  set  up  by  producers  and  sellers  when  they  are  not 
held  down  by  the  restraints  of  competition.  A  man  may 
have  a  patent  on  some  device  that  costs  but  little  to  make, 
but  which  satisfies  some  pressing  demand  of  buyers. 
It  is  the  only  device  that  does  satisfy  this  demand  and 
the  man  who  owns  the  patent  has  the  exclusive  right  of 
manufacture  and  sale.  The  buyer  must  buy  of  him  or  go 
without.  Under  such  conditions  the  owner  of  the  patent 
will  not  sell  this  device  at  the  cost  of  its  production  in- 
cluding normal  profit.  He  wants  more.  He  wants  the 
price  to  cover  the  cost  and  secure  to  him  an  abnormal 


THE  LAWS  OF  PRICE  169 

profit.  He  wants  all  he  can  squeeze  out  of  the  market. 
The  price  he  decides  to  charge  will  be  a  monopoly  price, 
called  a  monopoly  price  because  the  goods  to  which  it  can 
be  attached  are  those  that  are  produced  under  monopoly. 

There  are  many  kinds  of  monopoUes  besides  those  that 
rest  on  patents.  About  twenty-three  square  miles  of 
anthracite  coal  lands  of  the  first  quality  exist  in  the  United 
States,  and  these  are  located  in  a  small  district  of  the  state 
of  Pennsylvania.  Under  such  conditions  competition 
has  slight  chance  to  control  the  price  of  coal.  Some  in- 
dustries, as  for  example  the  railway  industry,  tend 
towards  the  consoUdation  of  competing  lines,  and  the 
bigger  railway  systems  grow,  the  less  control  does  com- 
petition have  on  their  management.  Thus  we  say  the 
railway  industry  tends  always  to  become  a  monopoly. 

We  have  then  three  kinds  of  monopohes;  or,  better  ex- 
pressed, three  conditions  under  which  men,  in  their  strug- 
gle for  the  highest  possible  profit,  will  organize  their 
business  as  a  monopoly  and  charge  monopoly  prices. 
These  are: 

Where  the  law  grants  exclusive  rights  of  production 
and  sale,  as  in  the  case  of  a  patent. 

Where  an  individual  or  a  group  of  individuals  own 
the  source  of  all  the  material  of  a  certain  kind,  or  the 
most  favorably  situated  source  of  power,  or  any  other 
agency  or  commodity  that  nature  may  have  bestowed. 

Where  an  industry  tends  to  grow  and,  by  virtue  of  its 
size,  enables  its  owners  to  set  a  price  on  what  it  makes  in 
excess  of  the  normal  price. 

In  all  three  cases,  competition  is  powerless  to  fix  a 
normal  price.  The  law  for  which  we  are  seeking  is  the 
law  of  monopoly  price. 


170  DESCRIPTION  OF  INDUSTRY 

In  searching  for  the  law  of  monopoly  price,  we  must  not 
think  of  a  monopolist  as  different  in  any  way  from  an 
ordinary  business  man.  Both  are  actuated  by  the  same 
motives.  Both  aim  to  sell  what  they  produce  for  the 
highest  price  the  market  will  stand.  The  only  differ- 
ence is  that  one  can  and  the  other  cannot  charge  more 
than  the  normal  price  for  goods  sold.  The  market  on 
which  monopoly  goods  are  offered  for  sale,  also,  is  the 
same  market  as  that  on  which  other  goods  are  offered  for 
sale.  Moreover,  the  buyers  on  this  market  act  in  the 
same  way  whether  they  contemplate  buying  goods  pro- 
duced under  monopoly  conditions  or  under  competitive 
conditions.  The  two  cases  are  wholly  alike  with  a  single 
exception,  namely,  the  monopolist  can  control  the  supply 
of  goods  to  be  sold,  the  competitive  producer  cannot. 
If  we  can  discover  the  way  a  monopolist  reasons  when  he 
offers  goods  for  sale,  we  shall  then  know  the  law  of  mo- 
nopoly price. 

The  reasoning  that  controls  a  monopolist  in  fixing  a 
price  is  somewhat  as  follows:  If  he  charges  too  much  for 
his  goods,  he  will  not  be  able  to  sell  them.  Consumers  will 
not  use  their  money  to  buy  his  goods.  On  the  other  hand, 
if  he  charges  too  little  for  his  goods,  while  he  will  be  able 
to  sell  them  in  large  quantities,  the  rate  of  profit  on  each 
sale  will  be  so  low  that  the  total  of  profit  for  a  year's 
business  will  be  disappointing.  Somewhere  between 
these  two  points, — the  too  high  price  and  the  too  low 
price — ^there  is  a  price  that  will  give  him  the  highest  pos- 
sible return  on  a  year's  business.  This  price  is  the  monop- 
oly price.  It  is  the  price  which  the  monopolist  finds  to  be 
the  most  profitable  to  charge. 

But  how,  it  may  be  asked,  can  one  discover  this  price? 


THE  LAWS  OF  PRICE  171 

By  experiment.  There  is  no  other  way.  The  monop- 
olist first  puts  on  a  very  high  price,  but  no  one  will  buy 
his  goods.  He  then  reduces  the  price  and  so  gains  a  few 
buyers,  but  the  amount  of  sales  is  so  low  that,  even 
though  the  profit  per  sale  is  high,  the  total  of  the  year's 
profits  is  small.  He  further  reduces  the  price,  and  by 
so  doing  increases  the  year's  profits.  This  he  will  continue 
to  do  until  he  finds  that  the  last  reduction,  while  it  in- 
creases the  number  of  sales,  does  not  increase  the  total  of 
the  year's  profits.  That  is  to  say,  the  loss  in  the  rate  of 
profit  on  all  sales  amounts  to  more  than  the  total  of  the 
profits  on  the  increased  sales.  Here  he  stops.  The 
experiment  is  ended.  He  has  found  the  price  that  gives 
a  maximmn  profit,  and  this  is  the  monopoly  price. 

An  illustration  of  the  foregoing  analysis  will  not  be  out 
of  place,  and  an  illustration  will  be  chosen  designed  to 
make  clear  the  point  below  which  and  the  point  above 
which  monopoly  prices  cannot  go. 

Let  us  assume  that  a  man  holds  a  patent  for  the  only 
known  means  of  making  artificial  ice,  and  that  he  has 
set  up  his  plant  in  a  city  on  the  bank  of  a  lake  that  freezes 
in  the  winter.  To  make  the  case  simple,  our  city  is  so 
situated  that  no  ice  can  be  brought  in  from  an  outside 
supply.  Let  us  assume  further  that  it  costs  75  cents  a  ton 
to  make  artificial  ice  and  $1.50  a  ton  to  cut  it  on  the  pond 
and  store  it  for  sunmier  use.  How  will  the  manufacturer 
of  artificial  ice  fix  the  price?  Two  facts  are  certain. 
First,  he  cannot  charge  for  his  ice  more  than  $1.50  a  ton 
for  if  he  does  consumers  will  buy  the  natural  ice.  At  that 
point,  competition  comes  in  and  restrains  the  rise  in 
price.  Second,  he  will  not  offer  ice  at  a  price  lower  than 
75  cents  a  ton,  for  at  a  lower  price  he  will  lose  money  on 


172  DESCRIPTION  OF  INDUSTRY 

its  manufacture  and  sale.  The  cost  of  production  sets 
the  lowest  price  for  monopoly  goods  as  well  as  for  goods 
produced  under  condition  of  competition. 

The  range  of  possible  prices,  in  our  assumed  case,  will 
be  somewhere  between  75  cents  and  $1.50  a  ton.  Let  us 
suppose  he  starts  to  sell  ice  at  $1.40  a  ton.  He  will  prob- 
ably get  most  of  the  customers  for  natural  ice,  but  the 
reduction  is  not  enough  to  induce  those  who  at  the  old 
price  had  not  used  ice  to  become  regular  purchasers. 
The  rate  of  profit  on  ice,  if  produced  at  75  cents  and  sold 
at  $1.40,  is  high,  but  the  amount  sold  at  that  price  is  so 
small  that  the  business  is  at  best  a  second  rate  business. 
The  manufacturer  reduces  the  price  to  $1.25  a  ton.  This 
is  a  considerable  drop,  but  the  sales  increase  to  such  a 
degree  that  the  net  profit  at  the  close  of  the  year  is  greater 
than  it  was  when  ice  was  sold  at  $1.40  a  ton.  Such  a 
reduction  in  the  price  is  good  business.  Encouraged  by 
this  experiment,  he  may  contemplate  a  further  reduction 
of  the  price,  and  he  sends  agents  through  the  city  to  in- 
quire how  many  famihes  that  go  without  ice  would  be- 
come customers  if  the  price  were  further  reduced.  His 
investigation  shows  that  the  increased  sales  at  a  lower 
price  would  not  balance  the  decreased  profit  on  sales  at 
a  higher  price.  TThe  result  is  he  settles  on  $1.25  a  ton  as 
the  most  profitable  price  to  charge  for  ice)) 

This,  then,  is  the  law.  The  monopoly  price  tends  to 
settle  at  that  point  which  will  give  the  largest  amount  of 
net  profit  on  assured  sales. 

§  42.  Speculative  Price. — The  above  laws  of  price  are 
true,  or  would  be  true,  if  there  were  a  perfect  market. 
Since,  however,  the  conditions  of  a  perfect  market  never 
exist,   it  frequently  happens  that  the  actual  price  at 


THE  LAWS  OF  PRICE  173 

which  goods  are  sold  is  neither  the  cost  price  nor  the 
monopoly  price.  There  may  be,  and  there  usually  is, 
a  speculative  element  in  all  prices. 

To  appreciate  this  point,  we  must  call  again  to  mind 
the  description  of  a  market.  The  following  is  quoted 
from  Professor  Jevons: 

"By  a  market  I  shall  mean  two  or  more  persons  dealing 
in  two  or  more  commodities,  whose  stocks  of  those  com- 
modities and  intentions  of  exchanging  are  known  to  all. 
It  is  also  essential  that  the  ratio  of  exchange  between 
any  two  persons  should  be  known  to  all  the  others.  It  is 
only  so  far  as  this  community^  of  knowledge  extends  that 
the  market  extends.  Any  persons  who  are  not  acquainted 
at  the  moment  with  the  prevailing  ratio  of  exchange,  and 
whose  stocks  are  not  available  for  want  of  communication, 
must  not  be  considered  part  of  the  market.  Secret  or 
unknown  stocks  of  a  commodity  must  also  be  considered 
beyond  reach  of  a  market  so  long  as  they  remain  secret 
and  unknown.  Every  individual  must  be  considered  as 
exchanging  from  a  pure  regard  to  his  own  requirements 
or  private  interests,  and  there  must  be  perfectly  free 
competition,  so  that  anyone  will  exchange  with  anyone 
else  upon  the  slightest  advantage  appearing.  There  must 
be  no  conspiracies  for  absorbing  and  holding  supplies 
to  produce  imnatural  ratios  of  exchange.  Were  a  con- 
spiracy of  farmers  to  withhold  all  corn  from  market,  the 
consumers  might  be  driven,  by  starvation,  to  pay  prices 
bearing  no  proper  relation  to  the  existing  supphes,  and  the 
ordinary  conditions  of  the  market  would  be  thus  over- 
thrown." 

As  a  matter  of  fact,  no  such  market  as  Professor  Jevons 
describes  ever  existed.     There  are,  in  the  great  majority 


174  DESCRIPTION  OF  INDUSTRY 

of  transactions,  so  many  elements  of  speculation  and  un- 
certainty, that  men  are  able  to  exact  a  speculative  rather 
than  a  normal  price.  This  speculative  price  may  be  de- 
fined as  the  difference  between  the  normal  price  and  the 
actual  price  which  market  conditions  at  the  time  enable  the 
seller  to  charge  and  compel  the  buyer  to  pay.  This  specu- 
lative price  gives  rise  to  a  speculative  profit,  so  that  we 
have  three  kinds  of  profit  rather  than  two,  namely;^ normal 
profit,  monopoly  profit,  and  speculative  profit.] 

This  speculative  price,  or  speculative  profit,  arises  in 
three  ways: 

First.  The  laws  of  normal  and  monopoly  price  move 
slowly. (it  may  take  two  or  three  years  before  producers 
can  catch  up  with  some  sudden  increase  in  the  demandJ 
During  this  period  the  market  price  will  stand  above  the 
cost  price  and  the  makers  of  the  goods  in  question  will 
reap  an  abnormal  profit.  This  abnormal  profit  is  made  up 
of  a  normal  profit  plus  a  speculative  profit. 

Second.  Certain  astute  business  men  may  have  informa- 
tion that  is  withheld  from  the  market,  as,  for  example,  an 
unknown  source  of  supply,  or  sales  already  made  not  gen- 
erally known,  or  the  sudden  rise  of  a  foreign  demand  for 
goods  usually  consumed  by  the  home  buyer;  or  other 
similar  conditions  known  at  first  only  to  a  few.  Those 
who  possess  this  knowledge  will  compute  the  price  differ- 
ently  from  those  who  do  not.  (^They  buy  and  sell  on  in- 
formation not  generally  available,  and,  as  a  result,  reap 
a  profit  in  excess  of  the  normal  profit.  J 

Third.  Speculative  prices  and  abnormal  profits  are  also 
the  result  ofl" conspiracies  for  absorbing  and  holding  sup- 
plies to  produce  unnatural  ratios  of  exchange. 'y  That  is  to 
say,  merchants  undertake  to  corner  the  market  and  force 


THE  LAWS  OP  PRICE  175 

excessive  prices  from  those  who  for  any  reason  must  have 
the  goods.  Producers,  also,  aim  to  monopolize  the  mar- 
ket by  limiting  production  so  as  to  reap  abnormal  profits. 
No  description  of  the  modern  business  world  as  it  ac- 
tually works,  would  be  complete  without  the  recognition 
of  speculative  prices,  and  of  the  conditions  out  of  which 
they  spring.  The  profits  to  which  speculative  prices 
give  rise,  are  called  by  some  "predatory"  profits,  which 
is  a  polite  phrase  for  stealings.  It  is  no  part  of  this  book 
to  discuss  the  correctness  of  that  phrase.  Industrial 
society  as  at  present  organized,  and  the  market  as  it  now 
works,  force  us  to  recognize  three  kinds  of  price :  namely, 
the  normal  price,  the  monopoly  price,  and  the  speculative 
price.  The  problems  which  spring  from  this  statement 
are  serious  problems,  but  this  book  is  a  description,  and 
not  a  discussion,  of  the  business  world. 


CHAPTER  X 
THE  MONEY  SYSTEM  OF  EXCHANGES 

"There  cannot,  in  short,  be  intrinsically  a  more  insignificant 
thing,  in  the  economy  of  society;  except  in  the  character  of  a  con- 
trivance for  sparing  time  and  labor." — -Mill. 

We  have  learned  that  practically  all  goods  which  are 
produced  appear  on  the  market  to  be  exchanged  for  other 
goods.  We  have  learned  that  "price"  is  a  market  word, 
and  that  it  stands  for  the  exchange  value  of  any  par- 
ticular thing  as  expressed  in  terms  of  money.  We  do  not 
know,  however,  except  in  a  general  way,  what  money  is, 
or  the  role  it  plays  in  the  business  world.  To  explain 
money  as  an  instrument  in  industry  is  the  purpose  of  the 
present  chapter. 

§  43.  The  Ftmctioiis  of  Money. — No  formal  definition 
of  money  will  be  attempted.  Better  results  will  follow 
a  study  of  some  of  the  important  services  which  money 
renders  in  the  business  world,  or,  to  make  use  of  a  techni- 
cal phrase,  better  results  will  follow  a  description  of  the 
money  functions.  If  we  are  able  to  learn  what  money  does, 
we  shall  have  gamed  a  satisfactory  knowledge  of  what  money 
is,  and  be  able  to  appreciate  a  good  monetary  system. 

The  important  functions  of  money  are  three.  Money 
serves 

as  a  medium  of  exchange, 
as  a  measure  of  value,  and 
as  a  standard  of  deferred  payments. 
Each  of  these  functions  will  be  considered  separately. 

176 


THE  MONEY  SYSTEM  OF  EXCHANGES     177 

(a)  Money  as  a  Medium  of  Exchange. — All  goods  that 
appear  on  the  market  are  listed  for  sale  at  a  given  price. 
This  is  true  of  producers  who  sell  to  merchants  as  well  as  of 
merchants  who  sell  to  consumers.  The  producer  sells  what 
he  has  made  for  money  and  spends  this  money  in  buying 
what  he  desires  of  other  kinds  and  sorts  of  things.  The 
money  itself  satisfies  no  desire,  and  he  would  not  be  willing 
to  accept  it  in  exchange  for  the  goods  which  he  has  pro- 
duced, were  he  not  sure  of  its  acceptance  by  those  who  have 
other  goods  to  sell.  Money  thus  used  is  a  medium  for 
effecting  an  exchange  of  goods.  Selling  for  money  what 
one  has  made  and  buying  with  money  what  one  needs,  con- 
stitute an  exchange. 

The  use  of  money  for  effecting  an  exchange  is  not  ab- 
solutely necessary  any  more  than  the  use  of  machinery  is 
necessary  for  production.  Goods  may  be  exchanged  by 
barter;  that  is  to  say,  goods  of  one  kind  may  be  exchanged 
directly  for  goods  of  another  kind.  A  butcher,  for  exam- 
ple, instead  of  selling  meat  for  money  might  trade  meat 
directly  for  what  he  needs.  He  might  give  a  pound  of 
sausage  for  a  necktie,  a  pound  of  beef  for  a  peck  of  pota- 
toes, a  quarter  of  lamb  for  a  pair  of  shoes,  or  a  rasher  of 
bacon  for  a  cake  of  soap. 

While  such  a  system  of  exchanges  might  be  possible  in 
a  primitive  market,  it  could  not  be  used  on  the  market 
known  to  the  modem  business  world.  One  difficulty 
with_makinp;  exchanges  by  barter  arises  from  the  fact 
that,  while  one  man  may  have  something  to  sell  and  an- 
other man  may  desire  to  possess  this  thing,  the  second 
man  may  not  have  anything  to  give  in  exchange  which 
the  first  man  desires.  It  takes  two  to  make  a  bargain. 
To  effect  an  exchange  there  must  be  a  "double  coincidence 


178  DESCRIPTION  OF  INDUSTRY 

'      of  desire";  that  is  to  say,  each  party  to  the  exchange 

must  desire  what  the  other  party  has  to  offer. 
^  A  lack  of  the  coincidence  in  the  quantities  ^desired  by 
the  two  parties  to  the  exchange,  may  be  equally  embar- 
rassing. A  man  who  produces  milk  may  want  an  automo- 
bile; but  the  automobile  agent  does  not  want  as  much 
milk,  at  least  not  at  one  time,  as  an  automobile  is  worth. 
o  The,  impossibility  of  splitting  a  transaction,  also,  is  a 
serious  embarrassment  to  exchanges  by  barter.  A  berry 
grower,  for  example,  markets  his  products  in  a  few  weeks' 
time;  but  he  cannot  accept  in  exchange  a  heap  of  all  sorts 
and  kinds  of  goods.  He  would  not  specialize  in  the  pro- 
duction of  berries  for  a  market  so  badly  organized.  What 
he  wants  is  to  dispose  of  his  berries  now,  and  select  the 
goods  he  desires  in  exchange  at  his  convenience. 

These  difficulties  incident  to  barter  are  overcome  by 
selecting  some  commodity  of  universal  desire  to  serve  as 
a  medium  of  exchange.  It  makes  no  difference  why  all 
men  want  this  thing,  and  want  it  at  all  times  and  in  un- 
fimited  quantities.  The  fact  that  it  is  universally  desired 
makes  everyone  willing  to  sell  what  he  has  in  exchange 
for  this  thing,  because  he  knows  he  can  use  it  again  in  the 
purchase  of  other  things.  Whatever  conmiodity  serves 
this  purpose  is,  for  the  time  being,  money.  It  is  the  ac- 
cepted and  established  medium  of  exchange. 

(b)  Money  as  a  Measure  of  Valwr^^Money  serves  also 
as  a  measure  of  value.  It  is  the  thing  to  which  the  ex- 
change ratios  of  all  other  things  on  the  market  are  referred. 
The  importance  of  this  service  becomes  evident  when  it  is 
remembered  that  a  buyer  who  wishes  to  purchase  judi- 
ciously, must  compare  the  values  of  the  things  offered  for 
eale.    This  he  could  not  do  if  exchange  were  by  barter. 


THE  MONEY  SYSTEM  OF  EXCHANGES    179 

The  number  of  exchange  ratios  would  be  so  many,  and  in 
such  different  kinds  of  things,  that  he  would  not  be  able 
to  compare  them  and  decide  which  exchange  is  likely  to 
give  him  the  greatest  benefit.  If,  however,  every  article 
has  a  price,  the  money  expression  of  these  prices  serves 
as  a  common  basis  for  comparing  the  value  of  different 
things. 

The  seller  is  equally  interested  in  the  service  of  money 
as  a  measure  of  value  to  which  all  commodities  are  re- 
ferred. "Without  this  commodity  called  money,  he 
would  be  obliged  to  remember  as  many  different  ratios 
of  exchanges  as  there  are  possible  exchanges.  For  example, 
if  he  deals  in  ten  commodities  and  trades  by  barter,  he 
must  remember  forty-five  prices  or  ratios  of  exchanges; 
if,  however,  one  commodity  is  selected  to  serve  as  money, 
nine  prices  are  all  that  he  must  remember."  From  the 
point  of  view  of  the  merchant,  a  large  market  could  not 
be  managed  without  money  as  a  common  measure  or, 
as  it  is  sometimes  called,  a  common  denominator  of 
value. 

Money  as  a  measure  of  value  renders  yet  another  serv- 
ice. All  modern  industry  is  directed  by  a  desire  to  reap 
profits.  A  new  business  will  be  undertaken  if  it  gives  a 
promise  of  profit;  an  established  business  will  be  aban- 
doned if  it  fails  to  give  the  required  profit.  All  this  was 
explained  in  our  study  of  the  principle  of  control  in  in- 
dustry. Profit  is  the  difference  between  the  cost  of  pro- 
duction and  the  selling  price  of  the  goods.  No  close  cal- 
culation would  be  possible  and,  consequently,  the  principle 
of  controljiipon  which  the  modern  business  world  relies 
could  not  be  brought  into  play,  were  it  not  that  money 
serves  as  a  common  measure  for  all  calculations. 


180  DESCRIPTION  OF  INDUSTRY 

(c)  Money  as  a  Standard  of  Deferred  Payments. — ^The 
modem  business  world  makes  extensive  use  of  credit 
transactions.  When  a  housewife  orders  groceries  and  has 
them  charged  on  the  books  of  the  grocer,  the  purchase 
is  a  credit  purchase.  When  a  merchant  buys  goods  and 
gives  as  payment  his  note  due  in  sixty  or  ninety  days,  he 
is  said  to  buy  goods  on  credit.  When  a  farmer  borrows 
money  for  improving  his  farm  and  gives  his  note  for  the 
money  received  together  with  a  mortgage  on  the  land,  he 
is  said  to  secure  money  through  credit.  When  a  railway 
sells  its  bonds  and  with  the  proceeds  of  the  bonds  constructs 
a  right  of  way  and  buys  locomotives,  the  sale  of  such  bonds 
is  a  credit  transaction.  Probably  not  more  than  5%  of 
current  transactions  are  cash  transactions.  The  modem 
busuiess  world  rests  on  credit,  and  one  of  the  most  sig- 
nificant functions  of  money  is  that  it  renders  credit  trans- 
actions possible  by  serving  as  a  standard  of  deferred  pay- 
ments. A  bond,  a  note,  or  a  charge  on  the  books  of  a 
grocer  are  aUke  in  this:  they  all  make  use  of  monetary 
units  as  a  standard  of  deferred  payments. 

It  is  this  function  of  money,  also,  that  permits  industry 
to  be  organized  through  contracts.  Every  element  of 
value  in  an  agreement  for  co-operative  work  is  expressed 
in  terms  of  money.  Laborers  are  hired  at  so  many  dollars 
or  cents  a  day.  Two  men  form  a  partnership,  each  agree- 
ing to  put  a  certain  amount  of  money  into  the  business. 
Every  business  agreement  makes  use  of  the  language  of 
money.  Thus  all  industrial  enterprises  which  are  organ- 
ized to  do  business  for  a  long  term  of  years,  rest  on  money 
as  a  standard  of  deferred  payments. 

From  whatever  point  of  view  we  regard  the  business 
world,  money  is  seen  to  render  an  essential  service. 


THE  MONEY  SYSTEM  OF  EXCHANGES    181 

§  44.  Money  Material. — The  selection  of  a  proper 
money  material  deserves  special  attention.  In  communi- 
ties where  trade  was  carried  on  by  barter,  certain  things 
came  to  be  looked  upon  as  more  generally  acceptable 
than  other  things;  and  these  things  came  to  be  used  as 
money  before  the  traders  were  conscious  that  they  had 
taken  the  first  step  in  building  up  a  money  system.  This 
is  why  the  history  of  the  subject  shows  so  long  a  list  of 
things  wliich  have  been  used  as  money.  Among  the 
Greeks  and  early  Romans,  cattle  were  used  as  money. 
Our  modern  business  word  "capital"  springs  from  the 
custom  of  counting  wealth  per  capita;  that  is  to  say,  by 
the  head.  In  northern  climates,  skins  and  fure  were  used 
as  money.  In  these  cases,  the  store  of  value  or  the  stand- 
ard of  value  was  of  greater  significance  than  the  other 
money  functions.  Among  savage  or  semi-civilized  peoples, 
bright  shells  have  been  quite  generally  used  as  the  medium 
of  exchange.  This  is  the  wampum  of  the  early  American 
Indian. 

The  history  of  the  subject  also  shows  many  cases  in 
which  staple  commodities  were  used  as  money.  In  early 
Virginia,  for  example,  tobacco  served  the  money  func- 
tions. As  late  as  the  first  administration  of  Washington, 
jugs  of  whiskey  were  used  as  money  by  those  living  west 
of  the  Allegheny  Mountains.  The  reason  for  this  was, 
of  course,  that  these  people  could  not,  at  the  time,  get 
other  kinds  of  money  in  sufficient  amounts  to  secure  their 
needs  in  trade.  These  things  were  given  up  as  soon  as 
better  kinds  of  money  could  be  obtained. 

The  commodities  commonly  selected  as  the  best  money 
material  are  gold  and  silver,  for  these  commodities  possess, 
in  a  higher  degree  than  any  others  known,  the  several 


182  DESCRIPTION  OF  INDUSTRY 

properties   which   good   money  material  must   possess. 
These  properties  are: 

Universal  acceptability, 

Portability, 

Durability, 

Homogeneity, 

Divisibility, 

Stability  of  value,  and 

Cognizability. 

Universal  Acceptability. — Money  material  must  be 
universally  acceptable;  that  is  to  say,  it  must  be  desired 
by  everyone,  for  imder  no  other  conditions  could  it  serve 
in  a  perfect  manner  as  a  medium  of  exchange.  It  is  true 
that  the  selection  of  any  commodity  as  money  will  give 
it  a  value  which  it  otherwise  might  not  have,  but  it  is 
generally  thought  that  a  good  money  material  should  be 
desired  for  its  own  sake  as  well.  It  goes  without  saying 
that  if  money  is  not  universally  accepted,  it  cannot  serve 
as  a  medium  of  exchange. 

Portability. — Money  material  should  also  be  portable; 
that  is  to  say,  large  values  should  be  bound  up  in  small 
quantities.  Money  material  ought  to  possess  so  high  a 
value  that  a  small  fortune  could  be  carried  in  a  hand  bag. 
Durability. — Money  material  must  be  durable.  It 
should  be  of  a  texture  to  withstand  wear,  so  that  its  size 
and  weight,  when  coined,  should  change  as  little  as  pos- 
sible as  the  result  of  use.  It  should  neither  rust  nor  cor- 
rode, but  remain  of  the  same  quality  whether  locked  in 
a  vault,  buried  in  the  ground,  or  passed  daily  from  hand 
to  hand  as  a  medium  of  exchange. 

Hmnggeneity. — "No  substance  can  be  considered  suit- 
able for  the  purpose  of  money  if  different  parcels  of  it 


THE  MONEY  SYSTEM  OF  EXCHANGES     183 

are  of  different  degrees  of  goodness."    A  substance  of  the 


same  degree  of  goodness  throughout  is   homogeneous. 


It  is  alikein  all  its  parts.  It  is  capable  of  a  perfect  mix- 
ture. This  is  necessary  for  a  good  money  material  in  order 
that  its  value  may  be  in  proportion  to  its  weight.  An 
ounce  of  gold,  for  example,  is  worth  twice  as  much  as  half 
an  ounce,  and  half  as  much  as  two  ounces.  Were  this  not 
true,  it  could  not  serve  as  a  medium  of  exchange. 

Divisibility. — The  material  used  as  money  must  per- 
mit of  division  into  parts  without  loss  of  value.  An  ox, 
for  example,  is  not  readily  divisible;  at  least,  if  divided, 
the  ox  becomes  beef,  and  the  different  parts  have  dif- 
ferent values.  The  skin  of  a  silver  fox  may  be  used  as 
money,  but  to  cut  the  skin  would  in  large  measure  destroy 
its  value. 

Stability  of  Value. — Money  material  must  possess 
stability  of  value,  for  otherwise  it  could  not  serve  well 
the  function  of  a  standard  of  deferrgrj  payments.  Long 
time  contracts  and  agreements  are  quite  common  in  the 
modern  business  world.  A  railway  bond,  for  example, 
may  run  for  fifty  years.  One  who  buys  such  a  bond, 
pays  to-day  a  certain  amount  of  money  which  is  to  be 
returned  to  him  at  the  expiration  of  the  life  of  the  bond, 
and  it  is  highly  important  that  the  value  of  what  he  is  to 
receive  fifty  years  from  to-day  should  be  equal  to  the  value 
of  that  which  he  pays  when  he  buys  the  bond.  Stability 
of  value  is  an  essential  property  of  good  money  material. 

Cognizability. — This,  also,  is  an  important  quality. 
The  money  material  must  be  readily  recognized  to  be 
what  it  pretends  to  be.  If  money  is  to  pass  readily  from 
hand  to  hand  in  current  exchange,  it  should  not  be  nec- 
essary for  buyers  and  sellers  to  spend  much  time  in  testing 


184  DESCRIPTION  OF  INDUSTRY 

the  genuineness  of  the  medium  received  in  payment. 

^  The  chemist  has  called  gold  and  silver  "royal  metals" 

'  because  they,  of  all  metals,  are  able  to  withstand  the  action 

^  of  certain  acids.    The  genuineness  of  either  of  these  metals 

is  easily  tested,  and  for  that  reason  they  serve  readily 

the  several  functions  of  money. 

From  the  foregoing  statement,  it  is  easy  to  see  why  gold 
and  silver  have  been  selected  by  all  commercial  peoples 
as  the  commodities  which  combine,  in  the  highest  degree, 
the  properties  of  a  good  money  material.  Not  only  are 
they  universally  acceptable  because  they  are  used  as 
money,  but  their  intrinsic  qualities  are  such  as  to  secure 
for  them  a  universal  demand  for  other  uses. 

§  45.  Coined  Money. — A  study  of  coinage  covers  all 
questions  that  arise  in  the  manufacture  of  money  mate- 
rial to  serve  as  money.  The  process  of  exchanges  would 
be  slow  and  difficult  if  a  buyer  of  goods  were  obUged  to 
weigh  out  the  price  of  his  purchase,  and  if  the  seller  were 
obliged  to  test  the  genuineness  or  the  quality  of  the  gold 
or  silver  offered  in  exchange.  (It  is  the  object  of  coinage 
to  enable  money  to  pass  by  tale  rather  than  by  weight.J 
Coinage  may  be  defined  as  such  a  preparation  of  money 
material  that  each  piece  bears  on  its  face  evidence  of  its 
quantity  and  its  quality. 

We  are  accustomed  to  think  of  coins  as  round,  flat 
disks  of  metal  bearing  the  stamp  of  the  government. 
While  most  coinage  systems  have  adopted  this  shape  as 
best  adapted  to  money  uses,  the  history  of  this  subject 
shows  many  other  kinds  and  sorts  of  coins.  The  early 
Mexicans,  for  example,  placed  a  certain  quantity  of  gold 
dust  in  a  guill^and  sealed  the  ends.  This  quill  passed 
readily  from  hand  to  hand  in  exchange  for  goods  pur- 


THE  MONEY  SYSTEM  OF  EXCHANGES    185 

chased.  Neither  buyer  nor  seller  thought  it  necessary 
to  weigh  the  gold  or  to  test  the  metal.  In  early  CaUfor- 
nian  days,  the  gold  miners  were  accustomed  to  tie  their 
gold  in  little__bags,  each  of  which  contained  a  definite 
quantity  of  gold.  Many  devices  have  been  used  to  avoid 
the  necessity  of  using  scales  and  tests  in  buying  and  selling 
goods,  but  they  all  serve  the  same  purpose  as  coinage. 

At  the  present  time,  coinage  is  a  government  monopoly. 
In  the  United  States,  the  exclusive  right  to  coin  money 
lies  with  Congress.  This  is  necessary  in  order  to  maintain 
a  uniform  standard  for  all  money  transactions,  and  to 
prevent  the  circulation  of  counterfeit  or  debased  coins. 
The  coinage  system  of  any  country  is  expressed  in  the 
laws  that  have  been  passed  respecting  the  manufacture 
and  regulation  of  coins.    It  covers  the  following  topics: 

Kinds  of  coins, 

Form  of  coins, 

Rule  of  free  coinage,  and 

Laws  of  legal  tender, 
(a)  Kinds  of  coins. — Every  coinage  system  embraces 
three  classes  of  coins: 

standard  coins, 
subsidiary  coins,  and 
tokens. 
The  standard  coin  is  defined  by  law  as  being  a  fixed 
quantity  of  a  fixed  quality  of  some  specific  commodity, 
and  the  standard  unit  thus  defined  is  the  basis  of  the 
monetary  system.    It  is  the  unit  to  which  all  other  units 
are  referred.    In  the  monetary  system  of  the  United  States, 
the  standard  coin  is  the  gold  dollar,  and  the  gold  dollar 
contains  25.8  grains  of  metal,  of  which  nine  parts  are 
fine  gold  and  one  part  is  either  silver  or  copper.    The  pur- 


186  DESCRIPTION  OF  INDUSTRY 

pose  of  the  alloy  is  to  make  the  coin  hard  so  that  it  can 
resist  the  wear  due  to  constant  use. 

Subsidiary  coins  are  coins  of  less  denomination  than  the 
standard  coin  but,  if  weighed,  they  would  be  found  to 

carry  less  metal  thP"  th^  Hpnrmainnfinn  nf  ±hA  f»nin  would 

seem  to  require.^  The  fifty  cent  piece,  the  twenty-five 
cent  piece,  and  the  ten  cent  piece  are  subsidiary  coins. 
The  fifty  cent  piece,  for  example,  would  not  be  worth 
as  much  if  melted  up  and  sold  as  silver  as  it  is  if  used  in 
buying  goods  on  the  market.  Ten  fifty  cent  pieces  will 
buy  as  much  on  the  market  as  a  five  dollar  gold  piece, 
but  the  silver  which  they  contain  at  the  present  price  of 
silver  is  not  worth  more  than  four  gold  dollars,  j^  Sub- 
sidiary coins  have  an  exchange  value  in  excess  of  their 
commodity  value. ) 

The  silver  dollar  is  now  classed  as  a  subadiary  coin. 
although,  from  the  beginning  of  our  government  until 
1873,  a  silver  dollar  was  regarded  as  a  standard  coin. 
To  explain  the  reason  why  this  was  changed  would  lead 
us  too  far  into  the  monetary  history  of  the  country.  Pro- 
vided we  hold  in  mind  the  fact  that  the  money  system  of 
this  country  is  adjusted  to  the  requirements  of  a  single 
standard  rather  than  to  that  of  a  double  standard,  and 
that  the  presence  of  the  silver  dollars  now  in  circulation 
may  be  traced  to  the  time  when  the  double  standard  was 
used,  this  phase  of  the  subject  may  be  passed  by  with  the 
statement  that  the  silver  dollar  is  in  fact  a  subsidiary  coin. 

But  why,  it  may  be  asked,  is  the  commodity  value  of  a 
subsidiary  coin  less  than  the  coin  value?  The  reason  for 
this  is  the  necessity  of  keeping  a  sufficient  amount  of 
coins  ip^  circulation  to  carry  on  the  daily  exchanges. 
Silver  is  used  in  the  arts  as  well  as  for  the  purpose  of  coin- 


THE  MONEY  SYSTEM  OF  EXCHANGES    187 

age.  If  the  silver  in  a  coin  were  as  valuable  when  melted 
up  as  it  is  in  the  form  of  a  coin,  a  jeweler  who  needs  silver 
for  use  in  his  trade  would  pick  out  the  full  weight,  fifty 
cent  pieces,  quarters  and  dimes  and  use  them  as  material 
for  manufacturing  jewelry.  Not  only  would  this  impose 
on  the  government  an  unnecessary  expense  for  coining 
new  pieces,  but  it  would  tend  to  decrease  the  amount  of 
coins  in  circulation.  If,  on  the  other  hand,  these  sub- 
sidiary coins  are  worth  more  as  money  than  they  are  as 
silver,  the  jeweler,  in  case  he  wants  silver  to  work  up,  will 
purchase  silver  bullion  rather  than  melt  coins.  The  only 
purpose  of  debasing  subsidiary  coins  as  compared  with  the 
standard  coin,  is  to  keep  them  in  circulation^ 

Tokens  or  minor  coins  are  coins  of  smaller  denomination 
than  the  subsidiary  coins.  rThey  are  made  of  inferior 
metal,  such  as  nickel,  bronze,  or  copper,  and  their  metal 
value  stands  far  below  their  coin  value.  jThey  are  made 
a  part  of  the  coinage  system  merely  for  Convenience.  An 
amount  of  either  silver  or  gold  of  no  more  worth  than  a 
five  cent  piece,  would  be  so  small,  if  coined,  that  it  could 
not  be  readily  used  in  ordinary  purchases  from  day  to  day. 

(b)  Fjjrm  of_CW'ng,r:^In  the  manufacture  of  coins, 
several  requirements  are  held  in  mind.  In  the  first  place, 
coins  must  be  made  in  such  a  way  as  to  render  counter- 
feijing^difficult.  The  designs  on  a  coin  are  not  only  some- 
what complex  and,  on  that  account,  difiicult  to  imitate,  but 
these  designs  can  only  be  reproduced  by  the  use  of  powerful 
machiaery.  This  fact  goes  far  to  discourage  counter- 
feiting. Moreover,  the  coin  is  so  made  that  It  gives  a 
ringing  sound  when  thrown  on  a  hard  surface.  A  coin 
made  of  lead  or  any  inferior  metal  would  not  give  that 
sound.    The  thickness  and  diameter  of  each  coin  must 


188  DESCRIPTION  OF  INDUSTRY 

be  exact  and  its  weight  must  be  the  weight  prescribed  by 
law.  It  is  not  possible  to  make  a  coin  which  meets  the 
requirements  of  both  size  and  weight  out  of  any  material 
but  that  of  standard  silver  or  gold. 

The  coins  should,  in  the  second  place,  be  so  manufac- 
tured as  to  prevent  fraudulent  removal  of  the  metal.  They 
are  made  thin  in  order  to  prevent  boring  holes  into  the 
edges  and  filling  these  holes  with  lead.  They  have  ser- 
rated edges  in  order  to  prevent  paring  off  the  edge  of  the 
coin  with  a  knife.  The  design,  also,  is  such  that  the  sweat- 
ing of  coins  may  be  easily  detected. 

A  third  mark  of  a  good  coin  is  that  it  should  be  made  in 
such  a  way  as  to  reduce  their  wpat  as  much  as  possible. 
This  is  why  all  coins  have  a  ridge  of  plain  metal  about  the 
design  Uke  a  frame  about  a  picture.  This  ridge  is  raised 
slightly  above  the  design  so  that  when  they  are  carried 
in  a  purse  or  in  the  pocket,  there  will  be  little  or  no  rubbing 
of  surface  against  surface. 

A  good  coin,  also,  must  be  convenient;  that  is  to  say, 
it  must  not  be  so  small  as  to  be  readily  lost,  nor  must  it  be 
so  large  that  it  is  burdensome  to  carry.  A  gold  dollar, 
for  example,  would  not  be  more  than  half  the  size  of  a 
bronze  cent.  For  this  reason,  the  smallest  gold  coin  in 
circulation  is  the  $2.50  gold  piece.  At  one  time  a  three 
cent  silver  piece  was  used,  but  the  inconvenience  which 
attended  its  use  led  it  to  be  recalled.  The  fifty  cent  piece 
is  the  largest  silver  coin  that  meets  the  requirements  of 
convenience. 

Much  study  has  been  given  to  the  designs  upon  a  coin. 
The  general  rule  followed  is  that  the  design  should  be  both 
artistic  and  educativg.  Countries  which  have  kings  or 
emperors  are  accustomed  to  place  the  image  of  the  ruling 


THE  MONEY  SYSTEM  OF  EXCHANGES    189 

sovereign  upon  the  coin.  This  is  one  reason  why  collec- 
tions of  coins  are  of  such  great  interest.  When  the  mint 
laws  for  the  United  States  were  first  passed,  Congress 
discussed  at  length  the  designs  to  be  placed  upon  the  coins. 
There  was  considerable  fear  at  that  time  that  this  country 
might  be  turned  into  a  monarchy,  and  anti-democratic 
proposals  met  with  no  favor.  This  is  why  a  figure  of 
"Liberty"  is  stamped  on  our  coins  and  not  the  profile  of 
Washington,  or  some  other  great  Revolutionary  leader. 
This  illustrates  what  is  meant  by  saying  that  the  designs 
upon  a  coin  should  be  educative.  Considerable  history 
may  be  read  from  the  coins  that  have  been  used  by  various 
peoples  at  various  times. 

It  is,  then,  apparent  that  quite  a  number  of  considera- 
tions must  be  held  in  mind  in  the  manufacture  of  the  money 
material  into  exchangeable  and  useful  coins.  Other  facts 
might  be  mentioned,  but  sufficient  has  been  said  to  sug- 
gest what  is  meant  by  the  technique  of  coinage. 

(c)  Rule  of  Free  Coinage. — The  general  rule  among 
commercial  peoples  is  that  anyone  who  has  money  ma- 
terial out  of  which  standard  coins  are  made,  can  bring 
it  to  the  government  mint  and  have  it  made  into  coins 
without  cost.  This  is  called  free  coinage.  A  charge  is 
made  for  the  alloy  to  be  mixed  with  the  pure  metal  in 
order  to  give  it  the  proper  hardness,  but  the  amount  of 
pure  gold  given  back  in  the  form  of  coin  is  the  same  as 
the  amount  brought  to  the  mint.  It  is  important  to  grasp 
this  fact,  for  it  is  frequently  used  in  discussions  of  mone- 
tary questions. 

The  reason  why  the  government  charges  nothing  to 
cover  the  expenses  of  manufacturing  coins,  is  that  this 
expense  is  trifling  as  compared  with  the  advantage  that 


190  DESCRIPTION  OF  INDUSTRY 

arises  from  the  fact  that,  under  free  coinage,  the  money 
value  of  a  coin  is  at  all  times  equal  to  the  commodity 
value  of  the  gold  which  the  coin  contains.  By  this  de- 
vice of  free  coinage,  the  amount  of  standard  coins  at  any 
time  in  the  country  will  tend  to  be  the  amount  that  is 
needed  to  carry  on  its  commercial  transactions  in  a  safe 
and  conservative  manner/  Under  the  free  coinage  of  the 
standard  unit,  the  amount  of  coins  at  any  time  in  circula- 
tion will  be  automatically  adjusted.  Such  is  the  argument 
for  free  coinage.  ) 

(d)  Lawsj£.  J-ognl  Tf^/Her. — In  order  to  ensure  the  uni- 
versal acceptability  of  money,  the  law  states:  first,  that 
all  money  must  have  its  stamp  of  approval;  and,  second, 
that  any  money  which  bears  this  stamp  is  legal  tender 
and  must  be  accepted  in  payment  of  a  debt.  Courts  in 
their  administration  of  contracts  are  permitted  to  assume 
that  the  debtor  who  has  tendered  legal  money  for  the 
payment  of  a  debt,  has  done  all  that  he  can  do  to  meet 
his  obligations.  If  the  creditor  refuses  to  accept  this 
money,  the  responsibility  for  the  loss  which  follows  lies 
with  the  creditor. 

Under  the  present  monetary  laws,  the  gold  dollar,  which 
is  the  standard  coin,  is  legal  tender  to  unlimited  amounts. 
Subsidiary  coins  are  a  legal  tender  but  to  the  amount  of 
$10.00,  while  token  coins  are  a  legal  tender  but  to  the 
amount  of  25  cents.  By  this  device  of  making  standard 
coins  legal  tender,  and  of  making  all  other  forms  of  money 
convertible  into  standard  coins,  the  universal  acceptance 
of  all  money  at  standard  values  is  ensured.  The  limitations 
placed  on  the  legal  tender  quality  in  the  case  of  subsidiary 
coins  obviates  the  possibility  of  any  serious  inconvenience 
in  their  use.    They  are  also  redeemable  in  standard  money. 


THE  MONEY  SYSTEM  OF  EXCHANGES    191 

§  46.  Paper  Money. — Gold  and  silver  are  expensive 
metals.  Their  value  is  high  because  of  their  scarcity  as 
compared  with  the  many  uses  to  which  they  may  be  put, 
and  because  the  cost  of  their  mining  is  high.  At  the  pres- 
ent range  of  prices,  there  is  not  enough  gold  and  silver 
in  the  world  to  perform  the  world's  exchanges. 

One  means  of  securing  reUef  from  so  serious  an  embar- 
rassment is  to  make  use  of  paper  notes  as  money.    These 
notes  may  be  the  promise  of  a  bank,  or  they  may  be  the 
pfomise  of  a  government.     In  this  country,  three  kinds  of 
paper  money  are  put  in  circulation.    These  are: 
Bank  Notes, 
Treasury  Notes,  and 
Gold  and  Silver  Certificates. 
Each  will  be  cursorily  described. 

(a)  Bank  Notes  used  as  Money. — A  note,  in  the  language 
of  business,  is  a  written  proniise  to  pay.  It  states  the 
amount  to  be  paid,  the  time  when  payment  is  due,  and  the 
name  of  the  payer  and  payee.  A  private  or  personal  note 
usually  bears  interest,  at  a  rate  named,  from  the  date  of 
its  making  to  the  date  of  its  payment.  A  note  of  this 
sort  in  the  hands  of  the  payee  may  be  passed  to  a  third 
party  in  settlement  of  an  obligation,  but  this  does  not 
mean  that  private  notes  are  money.  When  a  private 
note  is  thus  passed  from  hand  to  hand  it  must  be  endorsed 
with  each  transfer:  that  is  to  say,  he  who  passes  the  note 
must  sign  his  name  across  the  back.  He  then  becomes 
responsible  for  the  payment  of  the  note  in  case  the  original 
maker  fails  to  pay.  This  necessity  of  endorsement  on 
transfer  would  of  itself  prevent  the  use  of  private  notes 
as  a  medium  of  exchange. 

Bank  notes  are  like  private  notes  in  that  they  are  prom- 


192  DESCRIPTION  OF  INDUSTRY 

ises  to  pay.  They  stand  for  obligations  of  the  bank, 
being  signed  by  the  president  and  cashier  of  the  bank. 
They  differ  from  private  notes,  however,  in  three  par- 
ticulars. In  the  first  place,  the  name  of  the  payee  does 
not  appear  on  the  note.  A  bank  note  is  "payable  to 
bearer";  that  is  to  say,  whoever  has  it  in  his  possession  is 
the  payee  of  the  bank.  In  the  second  place,  no  date  is 
named  for  the  maturity  of  the  note.  The  bank  promises 
to  pay  the  holder  of  the  note  the  amount  named  at  any 
time  the  note  may  be  presented  for  payment.  The  thirH 
point  in  which  a  bank  note  differs  from  a  private  note  is 
that  no  endorsement  is  required  when  it  is  passed  from 
hand  to  hand  as  money. 

Every  country  has  its  own  pecuhar  system  for  the  issue 
and  use  of  bank  notes,  but  in  their  main  principles  they 
are  the  same.  The  bank  notes  used  in  the  United  States 
(^are  either  National  bank  notes  or  they  are  the  notes  of  the 
Federal  Reserve  banks!^  In  both  cases,  the  notes  rest 
on  federal  and  not  on  state  authority.  Many  state 
banks,  it  is  true,  have  the  right  to  issue  notes,  but  since 
Congress  imposes  a  tax^  ten  .p^r  cent  on  such  issues, 
state  banks  do  not  care  to  put  their  notes  in  circulation. 
This  is  the  first  significant  fact  respecting  bank  notes. 
They  are  federal  currency. 

One  may  ask  why  National  bank  notes  are  accepted 
everywhere  without  hesitation.  The  notes  of  a  National 
bank  that  has  failed  are  just  as  good,  so  far  as  purchase 
and  sale  is  concerned,  as  the  notes  of  banks  that  are  still 
solvent.  Indeed,  no  one  ever  looks  to  see  what  particular 
bank  has  issued  a  note  offered  to  him  as  payment.  If 
it  is  a  National  bank  note,  he  knows  it  is  good  and  accepts 
it  without  question.    What  is  the  basis  of  this  universal 


THE  MONEY  SYSTEM  OF  EXCHANGES    193 

confidence  (that  ^ins  for  National  bank  notes  universal 
acceptance?  / 

(The  basis  of  this  confidence  is,  that  the  United  States 
government  is  back  of  the  notes.  )  This  fact  becomes 
clear  when  we  notice  how  such  notes  are  issued.  In  case 
a  National  bank  desires  to  issue  notes,  it  is  obliged  to  buy 
United  States  bonds  and  deposit  them  with  the  Comp- 
troller of  the  Currency  at  Washington.  The  Comp- 
troller then  sends  blank  notes  to  the  bank,  and  these  notes, 
when  signed  by  the  president  and  cashier  of  the  bank, 
are  ready  to  be  paid  out  to  customers  who  ask  for  money. 
Suppose,  now,  the  bank  should  fail.  In  case  of  an  ordinary 
bank,  this  would  mean  that  the  holders  of  such  notes 
would  lose.  The  bank  could  not  pay  them,  and  for  that 
reason  no  one  would  receive  them  in  payment  of  a  debt. 
They  would  be  like  counterfeit  money  in  circulation. 
This,  however,  is  not  the  case  with  notes  of  a  National 
bank.  It  will  be  remembered  that  every  bank  has  de- 
posited government  bonds  with  the  Comptroller  of  the 
Currency  before  it  obtained  notes  for  issue.  These  bonds 
are  security  for  the  notes,  and,  should  a  bank  fail,  the 
Comptroller  of  the  Currency  is  obliged  to  sell  the  bonds 
and  use  the  proceeds  for  the  payment  of  the  notes.  It  is 
by  this  arrangement  that  the  holders  of  National  bank 
notes  are  secured  against  loss.  The  only  way  in  which 
confidence  in  these  notes  could  be  shaken  would  be  for 
the  government  to  repudiate  its  public  debt,  or  for  the 
Comptroller  of  the  Currency  to  refuse  to  do  what  the  law 
says  he  shall  do. 

National  bank  notes  are  not  legal  tender.  They  are, 
however,  convertible  into  legal  tender  when  presented  at 
the  counter  of  any  national  bank,  and  by  this  means  are 


194  DESCRIPTION  OF  INDUSTRY 

tied  to  the  standard  money  of  the  country.  Their  value 
fluctuates  with  the  value  of  the  gold  dollar. 

One  difficulty  with  National  banks  is  that  the  currency 
which  they  provide  does  not  quickly  respond  to  the  needs 
of  business.  A  country  needs  to  have  more  money  in 
Circulation  at  one  time  of  the  year  than  at  another. 
When  the  wheat  crop  is  to  be  moved,  more  money  than 
usual  is  needed  in  the  Northwest.  When  the  cotton  crop 
is  to  be  moved,  the  South  calls  for  more  money. 

In  order  to  meet  this  need  for  an  elastic  currency, 
Congress,  in  1914,  created  twelve  gigantic  institutions, 
owned  by  the  banks  of  the  country  and  supervised  by  the 
government,  whose  chief  business  it  is  to  provide  all  the 
extra  money  the  country  needs  at  all  times.  This  it 
does  in  the  following  manner:  If  a  local  bank  needs  more 
notes  to  loan  to  its  customers,  it  can  secure  them  by 
sending  first  class  "commercial  paper"  to  the  reserve 
bank  in  its  district,  and  receive  in  return  Federal  Reserve 
notes.  The  security  for  these  notes  is  the  commercial 
bills  and  notes  deposited  by  the  local  bank.  This  brief 
mention  of  the  Federal  Reserve  notes  completes  the 
description  of  the  bank  note  system  of  the  United 
States.  Corresponding  adjustments  will  be  found  in  every 
country. 

(b)  Treasury  Notes. — Not  unfrequently,  governments 
issue  their  own  notes  to  be  used  as  money.  The  money 
we  commonly  call  "greenbacks"  is  an  illustration  of 
such  notes.  They  usually  come  into  circulation  because 
the  government  is  pressed  for  funds  as,  for  example,  in 
time  of  war.  The  government  may  be  in  need  of  war 
material,  such  *  as  guns,  uniforms,  harnesses,  or  food. 
For  some  reason  it  may  not  be  wise  to  borrow  and  it  is 


THE  MONEY  SYSTEM  OF  EXCHANGES    195 

not  possible  to  wait  for  new  taxes  to  fill  the  Treasury. 
Under  such  conditions,  what  is  needed  may  be  bought  at 
once  and  paid  for  by  giving  to  the  sellers  treasury  notes. 
In  order  to  relieve  the  sellers  from  the  hardship  of  parting 
with  their  goods  for  promises  of  future  payment,  the 
government  giyes^its  notes  the  legal  tenderquality\_  This 
means  that  those  who  furnished  the  government  with 
suppUes  are  able  to  use  the  notes  in  buying  what  they 
want.  By  this  device,  these  notes  are  forced  into  cir- 
culation. They  pass  freely  from  hand  to  hand  in  business 
transactions.  They  perform  the  exchange  function  of 
money,  and,  if  issued  in  sufficiently  large  amounts,  may 
become  the  measure  of  value.  There  are  other  kinds  of 
treasury  notes,  but  the  "greenback"  sort  is  what  one 
commonly  means  when  he  speaks  of  government  paper 
money. 

(c)  C.^rir^£file^  nf  Df>j}nRii--\ii  a  convenience  in  han- 
dling exchange,  the  government  treasury  receives  gold  on 
deposit,  and  issues  a  certificate  of  such  deposit  in  the  form 
of  paper  money.  These  certificates  are  not  legal  tender j 
they  are  rather  representative  of  the  gold  or  silver  left 
with  the  government. 

In  the  case  of  a  deposit  of  gold,  the  certificates  are 
called  gold  certificates.  They  are  issued  in  denominations 
from  ten  to  ten  thousand  dollars.  They  may  at  any  time 
be  exchanged  for  the  gold  which  they  represent,  and 
because  of  this  fact  are  freely  used  in  all  commercial 
transactions. 

The  silver  dollars  were  never  a  popular  coin.  It  was 
diflicult  to  put  them  in  circulation.  One  device  for  doing 
this  was  to  issue  silver  certificates  in  the  form  of  paper 
money,  to  represent  the  silver  dollars  in  the  vaults  of  the 


196  DESCRIPTION  OF  INDUSTRY 

treasury.  These  appear  as  notes  in  the  denomination  of 
from  one  to  one  hundred  dollars,  but  ninety  per  cent  of  the 
total  amount  at  any  time  outstanding  must  be  in  denom- 
ination of  ten  dollars  and  less.  Silver  certificates  are, 
according  to  the  contract,  redeemable  in  silver  dollars, 
but  as  a  matter  of  fact,  they  are  freely  exchanged  into 
gold.  This  is  necessary  in  order  to  preserve  the  gold 
dollar  as  the  standard  unit. 

§  47.  Money  Principles. — Books  and  Hbraries  have 
been  written  on  industrial  problems  that  arise  in  connec- 
tion with  money.  Our  study  does  not  undertake  a  dis- 
cussion of  any  of  those  business  problems  that  present 
themselves  to  those  who  make  our  laws.  When,  however, 
the  general  principles  which  guide  legislation  are  univer- 
sally accepted,  their  statement  comes  to  be  a  part  of  a 
description  of  industry,  and,  for  that  reason,  are  included 
within  the  scope  of  our  study. 

Attention  will  be  called  to  three  well-established  mon- 
etary principles. 

(a)  The  Value  of  Money.— The  value  of  money,  that  is 
to  say,  its  exchange  power,  as  compared  with  all  kinds 
and  sorts  of  goods  offered  for  sale,  depends  upon  the 
amount  of  money  at  any  time  in  circulation.  "The 
value  of  money  is  inversely  as  general  prices."  If  prices 
on  the  market  go  up,  this  means  that  the  value  of  money 
goes  down.  On  the  other  hand,  if  general  prices  on  the 
market  go  down,  this  means  that  the  value  of  money 
goes  up.  In  any  particular  study  of  the  movement  of 
market  prices,  it  is  necessary  to  determine/whether  this 
movement  is  due  to  a  change  in  the  value  of  money,  by 
which  prices  are  measured,  or  a  change  whiqh  pertains 
to  the  manufacture  of  goods  offered  for  sale.)  The  ap- 


THE  MONEY  SYSTEM  OF  EXCHANGES    197 

plication  of  this  principle  is  frequently  blurred  by  the  fact 
that  a  great  variety  of  substitutes  for  actual  money  are 
extensively  used  in  the  modern  business  world,  but  the 
principle  as  stated  is  an  approximate  expression  of  an 
important  commercial  fact. 

(b)  Greshamls  Law.— A  second  general  fact  respecting 
money  is  expressed  by  what  is  known  as  Gresham's  Law. 
The  usual  statement  of  this  law  is  that  superior  money 
and  inferior  money  cannot  circulate  together;  the  in- 
ferior money  will  drive  the  superior  money  out  of  cir- 
culation. It  is  easy  to  understand  why  this  should  be 
true.  Money  is  used  for  making  purchases  or  for  paying 
debts.  Naturally,  if  there  are  two  units  of  value,  either 
of  which  could  be  used  for  the  discharge  of  a  debt,  the 
debtor  will  select  the  cheaper  unit. 

In  the  war  of  1861-65^  the  government  found  it  nec- 
essary to  issue  a  large  amount  of  paper  money  to  which 
they  gave  the  legal  power  of  paying  debts.  The  amount 
of  this  paper  money  issued  was  sufficient  to  carry  on  all 
of  the  commercial  transactions  of  the  country.  The 
result  was  that  gold  and  silver  disappeared  from  circula- 
tion, and  the  transactions  of  the  country  were  readjusted 
to  the  basis  of  paper  money.  This  is  an  illustration  of 
the  way  in  which  Gresham's  Law  works. 

For  over  a  hundred  years,  the  coinage  laws  of  the  United 
States  recognized  both  the  gold  dollar  and  the  silver  dollar 
as  a  standard  coin.  This  does  not  mean  that  both  kinds 
of  coins  were  used  as  standards  at  the  same  time,  for  if 
the  amount  of  silver  in  a  silver  dollar  was  worth  less  in 
bullion  than  the  amount  of  gold  in  a  gold  dollar,  the 
debtor  would  select  silver  rather  than  gold  with  which 
to  discharge  a  debt.    Under  such  conditions,  gold  would 


198  DESCRIPTION  OF  INDUSTRY 

disappear  from  circulation.  This,  too,  is  an  illustration 
of  Gresham's  Law. 

In  one  particular,  the  above  statement  of  Gresham's 
Law  is  imperfect.  In  order  that  inferior  money  may  drive 
superior  money  out  of  circulation,  this  inferior  money 
must  exist  in  sufficient  amounts  to  enable  it  alone  to  meet 
the  requirements  of  coT'TYif^'^^inl  friivr's^^timi^,  As  long 
as  both  a  superior  and  an  inferior  money  are  needed  to 
make  up  the  required  money  supply,  they  will  both  cir- 
culate side  by  side.  A  more  correct  statement  of  Gresh- 
am's Law  is  as  follows:  When  domestic  prices  are  graded 
to  the  superior  money,  there  will  be  a  concurrent  circula- 
tion of  superior  and  inferior  money,  as  though  all  were 
equal  in  value;  but  when  domestic  prices  are  graded  to  the 
inferior  money,  the  superior  money  will  disappear  from 
circulation. 

A  pertinent  question  may  be  submitted  at  this  point. 
How  can  one  tell  whether  prices  are  graded  to  the  superior 
or  to  the  inferior  money?  How,  for  example,  can  one 
prove  that  prices  in  this  country  are  now  graded  to  the 
gold  dollar  and  not  to  the  silver  dollar?  This  question 
may  be  easily  answered  by  an  experiment.  Suppose  one 
with  a  ten  dollar  gold  piece  which  contains  258  grains  of 
standard  gold  desires  to  buy  $10  worth  of  sugar  quoted 
at  123/^  cents  a  pound.  It  is  a  matter  of  indifference  to 
him  whether  he  pays  a  $10  gold  piece  or  258  grains  of 
standard  gold.  If  he  has  ten  silver  dollars,  he  can  buy  the 
same  amount  of  sugar  as  he  could  buy  if  he  paid  in  gold, 
but  no  one  would  sell  him  eighty  pounds  of  sugar  in  ex- 
change for  the  amount  of  silver  bullion  contained  in  the  ten 
silver  dollars.  At  the  present  price  of  silver,  they  would 
sell  him  not  more  than  fifty  pounds  of  sugar.    This  proves 


THE  MONEY  SYSTEM  OF  EXCHANGES     199 

that  the  market  price  of  sugar  is  adjusted  to  the  gold 
basis  and  not  to  the  silver  basis.  The  reason  why  silver 
dollars  circulate  and  do  the  work  of  gold  dollars,  is  that, 
under  the  law,  they  are  limited  in  quantity  and  can  be 
freely  exchanged  for  gold,  (jit  is  not  possible  for  those  who 
trade  in  silver  bullion  to  have  this  bullion  manufactured 
into  coin  in  unlimited  amounts.  This  explains  why  silver 
does  not  drive  gold  out  of  circulation  although  it  is  an 
inferior  coin,  and,  why  prices  do  not  adjust  themselves 
to  the  silver  basis.  ) 

A  sound  monetary  system  will  first  establish  a  standard 
unit  of  value  and  then,  by  granting  unlimited  coinage 
for  this  unit  and  by  limiting  the  coinage  of  other  units 
and  making  them  convertible,  will  be  able  to  keep  domestic 
prices  on  the  basis  of  the  standard  coin. 

(c)  The  Diffusion  of  Money. — The  stock  of  money  in 
the  world  tends  to  distribute  itself  to  the  various  countries 
or  trading  sections,  according  to  the  needs  of  these  sec- 
tions. Ordinarily  a  people  need  not  worry  over  keeping 
their  money  at  home  or  bringing  money  from  foreign 
countries.  [As  between  trading  countries,  money  will  go 
where  it  is  most  needed.  J 

This  is  accomplished  through  the  agency  of  trade.  If 
prices  for  staple  goods  are  lower  in  a  foreign  country  than 
at  home,  buyers  will  buy  abroad  rather  than  at  home. 
This  means  that  money  must  be  sent  abroad  to  pay  for 
the  goods.  This,  in  its  turn,  means  that  prices  will  tend 
to  fall  on  the  home  market  until  it  is  as  cheap  to  buy  at 
home  as  abroad.  If  we  can  see  that  money  is  drawn  to  a 
market  where  prices  are  low,  we  may  conclude  that  money 
will  flow  automatically  from  place  to  place  until  prices 
are  about  equal  in  all  trading  markets.    All  commercial 


200  DESCRIPTION  OF  INDUSTRY 

countries  have  given  up  trying  to  regulate  the  amount 
of  money  which  a  particular  country  should  have. 

§  48.  The  United  States  Money  System. — It  is  evident 
from  the  foregoing  discussion  that  a  money  system  may 
be  made  up  of  many  kinds  of  money,  and  that  it  rests 
on  many  kinds  of  laws.  The  situation  as  it  exists  in  any 
particular  country  is  only  explained  by  the  financial, 
political,  and  industrial  history  of  that  country.  The 
history  of  money  is  always  a  local  history.  This  impres- 
sion, as  also  the  impression  of  what  is  meant  by  a  money 
system,  will  be  gained  from  the  following  tabular  state- 
ment of  the  money  system  of  the  United  States.  This 
statement  gives  the  amounts  outstanding  of  the  different 
sorts  of  money,  and  a  per  capita  assignment  of  these 
amounts.  In  the  last  column  are  found  a  few  leading 
facts  respecting  each  kind  of  money. 


THE  MONEY  SYSTEM  OF  EXCHANGES    201 


TABtJIiAB  StaTEMEPTT  OP  THE  UNITED  STATES  MONETARY  StsTEM 


Kind  of  Money 


Amount  in  Circu- 
lation Incl.  Bank 
Notes,  June  30, 
1916 


Amount  per 
capita 


Facts  of  Law 

and 

Financial  Policy 


1.  Gold. 


%    646,213,000        $  6.46 


2.  Gold  1,413,823,289  14.13 

certificates. 

3.  Silver  dollars.  66,415,128  .66 


4.  Silver  489,910.937  4.89 

certificates. 


0.  Subsidiary 
silver  coins. 


6.  Token  coins. 


171,449,636  1.71 


67,047,795  .67 


7.  United  States  341,719,547  3.41 

Notes. 


8.  National  719,400.794  7.19 

Bank  Notes. 


9.  Federal  Re-  182,062,780  1.82 

serve  Notes. 


Standard  coin  is  one  dollar, 
containing  23.8  grs.  of  gold, 
9/10  fine.  Legal  tender  to 
all  amounts. 

Not  legal  tender,  but  redeem- 
able in  gold. 

Contains  412  gra.  silver,  9/lO 
fine.  Legal  tender;  while  not 
legally  redeemable  in  gold, 
they  are  readily  exchange- 
able and  therefore  pass  as 
gold  in  current  exchanges. 

Not  legal  tender;  not  legally 
redeemable  in  gold,  but  un- 
der government  piolicy  read- 
ily exchangeable  for  gold. 

Legal  tender  up  to  $10.  Re- 
deemable in  amounts  of  $20 
and       multiples.  Fifty, 

twenty-five,  and  ten  cent 
pieces. 

Legal  tender  up  to  twenty-five 
cents.  Redeemable  in 
amounts  of  $20  and  multi- 
ples. Five  cent  piece  and 
one  cent  piece. 

Legal  tender,  and  since  1879 
redeemable  in  gold.  De- 
nominations from  $1  to 
$1000. 

Not  legal  tender,  except  in 
dealing  with  national  banks 
and  the  government.  They 
are  redeemable  in  gold,  sil- 
ver, and  U.  S.  notes.  Issued 
in  denominations  of  $1  up 
to  $100. 

Not  legal  tender  except  in  pay- 
ments to  government.  Re- 
deemable in  gold.  Issued  in 
denominations  of  $5  to  $100. 


Total  Money  $4,098,042,906        $40.98 


Every  country  in  the  world  could  furnish  some  exhibit 
similar  to  the  above. 


CHAPTER  XI 
THE  CREDIT  SYSTEM  OF  EXCHANGES 

"A  bank  in  the  modern  sense  is  a  manufactory  of  credit  and  a 
machine  for  facilitating  exchanges." — Horace  White. 

The  process  of  exchanges  has  developed  by  three  well- 
marked  steps.  The  first  step  was  exchange  by  bartey; 
the  second  step  made  use  of  money  as  a  medium  of  ex- 
change; the  third  step  consists  in  the  partial  substitu- 
tion of  bank  credits  for  money.  The  reason  why  bank 
credits  are  used  is  found  in  their  greater  economy,  safety, 
and  convenience.  The  business  of  to-day,  with  its  world- 
wide interchange  of  products  and  its  methods  of  produc- 
tion that  extend  over  long  periods  of  time,  would  not  be 
possible  if  exclusive  reliance  were  placed  on  money  for 
effecting  exchanges.  It  is  the  purpose  of  the  present 
chapter  to  explain  how  exchanges  are  carried  on  through 
the  agency  of  banks. 

§  49.  The  Nature  of  the  Banking  Business. — In  order 
to  understand  how  banks  furnish  a  medium  of  exchange, 
it  will  be  necessary  to  describe  what  is  known  as  the  de- 
posit function  of  banking.  Merchants  and  business  men 
generally  do  not  care  to  keep  about  them  large  sums  of 
money.  Such  a  practice  would  require  that  each  merchant 
build  for  himself  a  safe  or  a  vault  for  the  keeping  of  his 
funds.  One  way  to  reduce  this  expense  would  be  for  mer- 
chants to  club  together  and  build  a  safety  vault  that  all 
could  use.  Another  way  would  be  for  some  one  not 
directly  engaged  in  the  business  of  producing,  transporting, 

202 


THE  CREDIT  SYSTEM  OF  EXCHANGES    203 

or  selling  goods,  to  build  a  safety  vault,  to  accept  the 
moneys  of  business  men  for  safe  keeping,  and  to  make  a 
charge  for  this  service.  Such  a  man  would  be  the  keeper 
of  a  warehouse  for  the  storage  of  money;  he  would  not 
however,  be  a  banker.  When  does  the  warehouseman 
become  a  banker?  This  question  provides  the  key  for 
explaining  the  peculiar  nature  of  the  banking  business. 

A  man  who  accepts  money  on  deposit,  agreeing  to  keep 
it  safely  and  to  return  a  like  amount  on  demand,  becomes 
a  banker,  when  he  loans  out  a  part  of  the  moneys  placed 
in  his  hands  for  safe  keeping  and  thus  makes  a  profit  for 
himself,  by  getting  interest  on  the  loan  of  other  people's 
money.  "When  a  man  lends  his  own  money,  he  is  a 
money  lender;  but  when  he  lends  the  money  of  other 
people,  he  becomes  a  banker."  Modem  bankers  make 
no  charge  for  the  safe  keeping  of  other  people's  funds. 
Indeed,  many  of  them  are  willing  to  pay  a^slight  interest 
on_deposits^  The  amount  of  interest  which  accrues  from 
the  loan  of  money  placed  in  the  hands  of  a  banker  by 
depositors,  is  the  source  of  bankers'  profits. 

That  the  above  is  a  correct  statement  of  the  manner  in 
which  the  banking  business  arose  is  shown  by  the  early 
history  of  the  Bank  of  England.  In  the  16th  century,  the 
merchants  of  London  placed  their  funds  in  the  hands  of 
the_govemment  for  safe  keeping,  these  funds  to  be  guarded 
in  the  Tower  of  London.  On  several  occasions,  however, 
it  was  found  that  the  King  had  used  this  money,  and  did 
not  find  himself  in  a  position  to  pay  it  back  to  the  mer- 
chants on  demand.  The  merchants  then  made  use  of  the 
silversmiths  as  custodians  of  their  funds.  The  silver- 
smiths, from  the  nature  of  their  trade,  were  obliged  to 
provide  vaults  and  guards  for  the  safe  keeping  of  their 


204  DESCRIPTION  OF  INDUSTRY 

property  and,  on  consideration  of  a  deposit  fee,  permitted 
the  merchants  to  make  use  of  their  vaults.  As  the  re- 
sult of  some  considerable  experience,  the  silversmiths 
discovered  that  they  always  had  on  hand  large  sums  of 
money  deposited  by  the  merchants,  and  they  quickly 
learned  that  they  could,  with  perfect  safety,  loan  a  por- 
tion of  these  funds  and  thus  make  for  themselves  the 
interest  which  accrued  on  such  loans.  When  this  double 
source  of  profit  to  the  silversmiths  was  discovered,  the 
merchants  did  not  withdraw  their  funds,  but  they  de- 
clined to  pay  a  storage  or  warehouse  charge.  Then  the 
silversmiths  werejihanged  into  bankers,  and  the  business 
of  banking  came  to  be  recognized  as  a  specialized  busi- 
ness in  the  London  business  world. 

Two  questions  arise  at  this  point.  First,  why  are  mer- 
chants willing  to  put  their  funds  in  the  banks,  knowing 
that  the  banks  will  make  use  of  these  funds  for  carrying 
on  their  own  private  business?  And,  second,  how  can 
bankers  safely  loan  money  received  on  deposit,  when 
they  have  promised  to  return  that  money  to  the  depositor 
on  demand?  A  satisfactory  answer  to  these  two  questions 
will  make  yet  more  clear  the  nature  of  the  banking  busi- 
ness. 

Answer  to  Question  One. — When  merchants  use  banks 
for  the  safe  keeping  of  their  funds,  they  are  excused  from 
^  the  expense  of  building  safety  vaults  and  providing  the 
necessary  watchmen.  This  the  banker  does  for  them  in 
return  for  the  privilege  of  using  their  money  while  in 
his  hands.  Another  reason  why  merchants  are  willing 
to  permit  the  banker  to  use  their  money  while  in  his 
hands,  is  that  the  maintenance  of  such  a  deposit  enables 
jir    them  to  transact  their  business  by  drawing  checks  rather 


THE  CREDIT  SYSTEM  OF  EXCHANGES    205 

than  by  payments  of  cash.  This  is  not  only  more  con- 
venient and  safer,  but  these  checks  serve  as  receipts  for 
payments  made,  and  are  something  of  a  record  of  current 
transactions.  Buying  and  selUng  by  merchants  and  the 
well-to-do  classes  generally  is  seldom  done  with  actual 
money.  How  payments  are  made  by  checks  is  explained 
in  a  following  paragraph. 

Answer  to  Question  Two. — ^When  a  banker  receives  the 
funds  of  business  men  on  deposit,  he  does  so  under  an 
agreement  that  he  will  pay  back  to  the  depositor  an 
equal  amount  of  money  whenever  the  depositor  may 
care  to  make  demand  for  repayment.  Should  all  de- 
positors make  a  demand  for  repayment  of  all  that  they 
deposited  on  any  particular  day,  the  bank  would  fail, 
for  the  bank  does  not  keep  on  hand  all  of  the  money 
thus  deposited.  The  safety  of  the  banker  in  lending  out 
a  portion  of  the  money  deposited  with  him  for  safe  keeping, 
rests  simply  on  business  experience.  The  only  use  which 
business  men  have  for  their  deposits  is  the  payment  of 
their  debts.  It  is  certain  that  a  business  man  will  not 
ordinarily  demand  the  return  of  his  money  unless  he 
wishes  to  use  it  in  the  payment  of  his  own  obligations. 
The  banker  knows  (that  these  obligations  will  not  fall 
due  all  on  one  dayj  and  on  this  account  he  feels  safe  in 
lending  deposits,  provided  he  keeps  enough  cash  on  hand 
to  meet  the  probable  demands  of  each  business  day. 

This  may  be  made  clear  by  an  illustration.  Suppose, 
for  example,  all  business  transactions  of  each  day  are 
equal  to  those  of  every  other  day  and  that  one-sixth  of 
all  outstanding  transactions  are  settled  each  day.  If, 
now,  the  banker  has  on  hand  an  amount  of  cash  equal  to 
one-sixth  of  the  transactions,  he  would  be  safe  in  lending 


206  DESCRIPTION  OF  INDUSTRY 

out  five-sixths  of  the  money  placed  in  his  hands  for  safe 
keeping.  This  illustration  assumes,  of  course,  that  the 
daily  deposits  of  cash  equal  one-sixth  of  the  transactions. 
It  also  assumes  that  no  other  calls  for  deposits  would 
be  made  except  those  that  arise  out  of  current  transac- 
tions. Nor  does  the  illustration  take  into  consideration 
the  current  system  of  bank  exchanges.  It  is  simply  an 
illustration  designed  to  explain  how  banks  can,  with 
safety,  promise  to  repay  enormous  sums  of  money  de- 
posited with  them  for  safe  keeping,  while  in  their  own 
vaults  there  will  be  at  any  time  only  a  small  portion  of 
such  funds. 

§  50.  The  Exchange  Functions  of  Banks. — The  above 
explanation  of  the  source  of  bankers'  profits  and  the  nature 
of  the  banking  business  was  necessary,  before  undertaking 
to  explain  the  manner  in  which  banks  facilitate  market 
exchanges.  This  is  done  in  two  quite  distinct  ways, 
namely,  by  providing  credit  media  of  exchange  for  the 
payment  of  debts  both  at  home  and  abroad,  and  by  con- 
verting the  non-spendable  wealth  of  the  community  into 
a  spendable  form  by  furnishing  the  owners  of  this  wealth 
with  media  of  exchange  in  the  form  of  money  and  credit. 
A  description  of  each  of  these  two  services  will  now  be 
considered. 

(a)  Exchanges  hy  Means  of  Checks  and  Drafts. — ^When 


a  depositorobtams^Tdeposit  credit  at  aTBank,  his  name 
is  entered  in  the  books,  and  he  is  given  the  right  of  draw- 
ing out  a  given  amount  of  money.  In  the  language  of  the 
street,  Mr.  A  has  opened  a  checking  account  with  the 
bank.  Suppose,  now,  that  Mr.  A  owes  money  to  Mr. 
B.  He  can  go  to  the  bank,  receive  the  cash,  and  with 
the  cash  pay  his  debt;  or  he  can  write  to  the  bank  and 


THE  CREDIT  SYSTEM  OF  EXCHANGES    207 

request  the  bank  to  pay  Mr.  B  this  amount  of  money 
directly.  In  either  case,  the  sum  paid  by  the  bank  on 
the  order  of  Mr.  A  will  be  charged  to  Mr.  A's  account. 
It  will  reduce  the  amount  of  credit  which  he  previously 
had  on  the  books  of  the  bank.  This  letter  which  he  writes 
to  the  bank  ordering  the  bank  to  pay  a  certain  sum  of 
money  to  Mr.  B  and  charge  this  payment  to  his  account, 
is  a  check,(and  by  the  use  of  the  check  he  has  paid  his 
debt  without  the  necessity  of  handling  any  moneyT) 
The  check  in  this  case  is  used  as  a  medium  of  exchange. 
A  check  transaction  is  substituted  for  a  money  transac-  / 
tion.    Credit  is  used  instead  of  money.  ) 

This  illustration  may  be  carried  a  step  further.  It  may 
be  that  Mr.  A  and  Mr.  B  are  cHents  of  the  same  bank,  and 
that  each  has  opened  with  the  bank  a  checking  account. 
In  this  case,  it  is  Ukely  that  Mr.  B,  when  he  receives  the 
check  of  Mr.  A,  having  no  immediate  use  for  the  cash, 
will  carry  the  check  to  the  bank  and  ask  that  it  be  de- 
posited to  his  credit  on  the  books  of  the  bank.  (This  is 
done  by  charging  the  amount  to  the  checking  account  of 
Mr.  A  and  crediting  the  same  amount  to  the  checking 
account  of  Mr.  B.)  The  transaction  is  completed,  but 
no  money  has  been  used.  The  transfer  which  effects  the 
change  is  a  transfer  of  credit  on  the  books  of  the  bank. 

/  Bank  bookkeeping  has  been  substituted  for  money  as  a      t 

I  medium  of  exchange. 

The  case  is  a  little  different  in  form,  although  the  same 
in  principle,  should  Mr.  A  and  Mr.  B  be  depositors  in 
different  banks.  In  this  case,  Mr.  A  draws  his  check  in 
favor  of  Mr.  B  against  the  bank  in  which  he  has  a  deposit, 
and  Mr.  B  will  accept  this  check  in  payment  of  the  debt. 
Mr.  B  will  not,  however,  go  to  the  bank  on  which  the 


208  DESCRIPTION  OF  INDUSTRY 

check  is  drawn  and  demand  the  money.  This  might  be  a 
matter  of  inconvenience  to  him.  He  will  deposit  the 
check  to  his  credit  in  the  bank  with  which  he  ordinarily 
does  business.  This  bank  will  take  the  check,  together 
with  numerous  other  checks  drawn  on  Mr.  A's  bank  and 
on  all  the  other  banks  of  the  city,  toj^^ommoiuneeting 
place  where  all  the  banks^  by  exchanging  checks,  cancel 
the  claims  which  each  bank  holds  against  the  others. 
This  cancellation  obviates  the  necessity  of  handling  large 
sums  of  money.  Such  a  place  is  called  a  "  clearing  house." 
The  situation  would  be  slightly  changed  if  "Mr.  A  lives 
in  Detroit  while  Mr.  B  lives  in  Cleveland.  Under  estab- 
lished banking  customs,  Mr.  B  takes  the  check  which 
Mr.  A  has  written  in  his  favor  to  his  own  bank  where, 
when  properly  endorsed,  it  is  accepted  by  his  bank  as 
though  it  were  a  deposit  of  cash,  the  settlement  being 
made  between  the  banks.  Mr.  B  receives  credit  in  the 
Cleveland  bank  for  the  check  which  Mr.  A  has  drawn, 
\but  the  Cleveland  bank  and  the  Detroit  bank  are  both 
depositors  in  a  bank  in  Chicago  or  New  York  City.  J  The 
Cleveland  bank  sends  Mr.  A's  check  to  the  Chicago  bank 
and  receives  credit  for  the  check  as  though  it  were  cash. 
The  Chicago  bank  then  charges  the  amount  against  the 
account  of  the  Detroit  bank  (the  check  itself  being  sent 
on  to  the  Detroit  bank),  and  it  is  charged  to  the  deposit 
account  of  Mr.  A.  If  this  illustration  be  extended  to 
include  all  the  banks  in  the  United  States,  some  idea  can 
be  gained  of  the  extent  to  which  bank  bookkeeping  is 
substituted  for  money  in  the  settlement  of  exchange 
transactions. 

The   Federal   Reserve   banking  system,   recently   or- 
ganized, conforms  to  the  principle  of  credit  exchanges 


THE  CREDIT  SYSTEM  OF  EXCHANGES    209 

made  clear  by  the  foregoing  illustration.  The  machinery- 
is  a  little  dififerent,  but  the  character  of  the  transaction 
is  the  same. 

The  principle  of  bank  exchanges  is  quite  the  same  when 
a  draft  instead  of  a  check  is  used.  The  difference  between 
a  check  and  a  draft  is  this:  A  check  is  drawn  by  an  in- 
dividugl  against  a  credit  which  he  has  created  by  a  de- 
posit with  a  particular  bank;  a  draft  is  drawn  by  abanker 
in  favor  of  an  individual  against  a  credit  which  the  bank 
has  created  by  a  deposit  in  some  other  bank.  Every  bank 
in  the  United  States  keeps  deposits  in  other  banks.  A 
draft  is  a  banker's  check  and,  when  sold  to  an  individual, 
enables  him  to  pay  a  debt  in  some  part  of  the  country 
where  he,  as  an  individual,  has  no  credit. 
/Suppose,  for  example,  a  business  man  in  a  small  town 
in  Illinois  desires  to  pay  a  bill  which  is  due  in  a  small  town 
in  New  Jersey/)  The  usual  procedure  in  this  case  is  for 
the  man  in  Ilhnois  to  buy  from  the  home  bank  a  draft 
on  some  bank  in  New  York  City  with  which  the  home 
bank  has  credit.  This  draft  is  drawn  and  made  payable 
to  the  New  Jersey  man;  that  is  to  say,  his  name  is  written 
on  the  face  of  the  draft  as  the  man  to  whom  the  New 
York  bank  must  pay  the  money.  This  draft  on  a  New 
York  City  bank  is  mailed  by  the  Illinois  man  who  owes 
the  money,  to  the  New  Jersey  man  to  whom  the  money 
is  owed.  When  the  New  Jersey  man  receives  the  draft, 
he  can  use  it  in  either  of  two  ways.  He  can  go  to  New 
York  and  present  the  draft  to  the  bank  on  which  it  is 
drawn  and  get  his  money,  or  he  can  present  the  draft  to 
his  home  bank  in  New  Jersey  and  either  receive  the 
money  or  have  the  amount  credited  to  him  as  a  deposit. 
The  transaction  is  completed  when  the  New  Jersey  bank 


210  DESCRIPTION  OF  INDUSTRY 

sends  the  draft  to  the  New  York  City  bank  and  accepts 
credit  for  the  amount  named. 

If  the  New  Jersey  man  does  not  want  the  cash  and 
deposits  the  amount  of  the  draft  in  his  home  bank,  the 
debt  is  paid  but  not  a  dollar  has  exchanged  hands.  The 
transaction  is  a  credit  transaction.  Bookkeeping  entries 
in  three  banks  have  performed  the  service  of  a  medium 
of  exchange.  The  books  of  the  Illinois  home  bank  (sup- 
pose the  draft  to  be  for  $100)  show  the  checking  account 
of  the  man  who  bought  the  draft  to  be  reduced  by  $100 
if  he  pays  for  the  draft  with  a  check,  or  the  cash  account 
of  the  bank  to  be  increased  by  a  like  amount  if  he  pays 
cash  for  his  draft.  The  books  of  the  New  Jersey  bank 
show  the  checking  account  of  the  man  to  whom  the  debt 
is  paid  is  increased  by  $100,  and  that  the  bank,  on  its 
part,  has  an  order  for  an  equal  amount  on  a  New  York 
bank.  The  draft  is  then  sent  to  the  New  York  bank, 
which  gives  credit  to  the  New  Jersey  bank  for  the  amount 
named.  The  result,  as  seen  on  the  books  of  the  New  York 
bank,  is  that  the  $100  is  taken  from  the  checking  account 
of  the  Illinois  bank  and  added  to  the  checking  account 
of  the  New  Jersey  bank.  Here,  also,  we  must  observe 
that  the  Federal  Reserve  system  has  provided  a  more 
direct  way  of  making  payments.  Under  this  system, 
there  is  a  tendency  for  the  substitution  of  personal  checks 
for  bank  drafts  in  making  out-of-town  payments. 

The  above  illustration  shows  how  a  debtor  in  the  West 
pays  his  creditor  in  the  East  by  means  of  a  transfer  of 
credit  from  one  account  to  another  account  in  the  New 
York  City  bank.  The  result  of  the  transaction  is  that 
the  Illinois  bank  has  $100  more  cash  (or  $100  less  deposit 
liability),  and  $100  less  credit  in  the  New  York  bank. 


THE  CREDIT  SYSTEM  OF  EXCHANGES    211 

Should  transactions  of  this  kind  continue,  it  is  evident 
that  all  of  the  credit  which  the  Illinois  bank  had  in  New 
York  would  be  converted  into  cash,  and  that  cash  to  an 
equal  amount  held  by  the  New  Jersey  banker  would  be 
converted  into  credit  on  the  books  of  the  New  York  bank. 
Under  such  conditions,  the  draft  of  an  Illinois  bank  would 
be  no  longer  honored  in  New  York  City  and,  consequently, 
the  merchants  of  the  Illinois  town  would  not  be  able  to 
pay  their  debts  in  the  East  by  drafts  as  heretofore.  It 
would  be  necessary  for  the  Illinois  bank  to  deposit  more 
cash  with  the  New  York  City  bank  and,  under  the  con- 
ditions assumed,  this  could  only  be  done  by  sending 
money  by  express  or  parcels  post. 

Our  illustration,  however,  does  not  tell  the  entire  story. 
It  is  confined  to  the  shipment  of  goods  from  the  East 
to  the  West  and  a  consequent  transfer  of  money  from  the 
West  to  the  East.  In  the  business  world,  as  we  know  it, 
goods  are  shipped  from  the  West  to  the  East  at  the  same 
time  that  goods  are  shipped  from  the  East  to  the  West. 
^So  far  as  the  East  and  the  West  as  trading  centers  are  con- 
cerned, the  value  of  goods  sent  in  one  direction  tends  to 
balance  the  value  of  goods  sent  in  the  other  direction.^ If 
these  exchanges  represent  values  of  equal  amounts,  neither 
locality  will  be  required  to  pay  money  to  the  other.  Ex- 
changes between  localities  as,  for  example,  between  the 
East  and  the  West  in  our  own  country,  are  in  fact  barter; 
goods  shipped  in  one  direction  pay  for  the  goods  shipped 
in  the  other  direction.  The  peculiar  service  rendered  by 
banks  is  to  keep  such  a  record  of  this  barter  as  will  permit 
every  buyer  and  every  seller,  whether  in  the  East  or  in  the 
West,  to  be  credited  with  the  goods  which  he  sells.  This  is 
easily  accomplished,  provided  every  business  man  de- 


212  DESCRIPTION  OF  INDUSTRY 

posits  the  drafts  which  he  receives  in  his  home  bank  and 
buys  the  drafts  which  he  sends  from  his  home  bank.  In 
this  way,  the  payments  and  receipts  of  each  man  will  be 
placed  on  the  books  of  the  banks  in  the  locality  where  he 
does  business,  and  the  debts  as  between  the  East  and  the 
West  will  be  settled  by  what  amounts  to  a  cancellation  of 
indebtedness  coming  in  and  indebtedness  going  out,  as 
represented  by  drafts  accepted  and  drafts  issued  by  local 
banks. 

(b)  Exchanges  through  Bank  Discounts. — ^In  order  to  un- 
derstand how  the  discounting  of  mercantile  paper,  and  the 
direct  lending  of  their  funds  by  bankers,  is  connected  with 
bank  exchanges,  we  must  first  learn  what  is  covered  by 
the  loan  and  discount  function  of  banks. 

In  Chapter  VII,  which  treats  of  "The  Market,"  it  was 
learned  that  the  same  material  appears  on  the  market 
many  times  and  under  many  forms  in  its  journey  from  the 
original  producer  to  the  final  consumer.  Thus,  cotton 
appears  as  raw  material,  cleaned  cotton,  and  cotton  cloth. 
This  cloth  is  owned  successively  by  the  manufacturer, 
by  the  wholesaler,  by  the  retailer,  and  finally  comes  into 
the  hands  of  the  consumer.  Each  step  in  this  journey 
involves  a  purchase  and  a  sale.  Thus,  the  cotton  pro- 
ducer sells  to  the  cotton  broker,  the  cotton  broker  to  the 
manufacturer,  the  manufacturer  to  the  wholesale  dealer, 
the  wholesale  dealer  to  the  retail  dealer,  and  the  retail 
dealer  to  the  consumer. 

It  may  be  that  two  years  have  elapsed  between  the  be- 
ginning and  the  ending  of  this  journey  from  the  cotton 
field  to  the  home  of  the  consumer.  It  is  not  until  the  goods 
are  sold  to  the  consumer  that  money  is  collected  for  the 
payment  of  the  merchants,  manufacturers,  and  growers 


THE  CREDIT  SYSTEM  OF  EXCHANGES    213 

of  the  cotton  goods  sold  over  the  counter  of  the  retail 
dealer.  /It  is  thus  evident,  that  if  each  transaction  were 
considered  by  itself,  the  cotton  grower  would  be  obliged 
to  wait  a  year  and  a  half  or  two  years  for  his  payment.^ 

As  a  matter  of  fact,  the  modern  business  world  could 
not  be  carried  on  were  payments  thus  delayed,  and  early 
settlements  are  made  possible  by  banks  through  direct 
loans  and  through  the  discount  of  mercantile  bills.  This 
method  of  prompt  settlement  may  be  made  clear  by  an 
illustration. 

It  may  be  assumed  that  a  cotton  broker  in  Georgia 
sells  cotton  to  a  cotton  manufacturer  in  Massachusetts. 
For  purpose  of  concise  statement  we  will  say  that  the  pro- 
ceeds of  the  sale  are  $10,000.  In  this  case,  the  broker  in 
Georgia  is  the  creditor  and  the  manufacturer  in  Massa- 
chusetts is  the  debtor.  Transactions  of  this  sort  are  seldom 
paid  for  in  cash.  Let  us  assume  that  the  sale  was  made  on 
ninety  days'  time;  that  is  to  say,  the  Massachusetts 
manufacturer  agrees  to  buy  cotton  if  the  Georgia  broker 
will  not  ask  for  the  cash  until  ninety  days  after  the  date 
of  the  sale.  The  result  of  this  first  step  in  the  transaction 
is  that  cotton  is  placed  in  the  warehouse  of  the  Massa- 
chusetts manufacturer,  and  the  Georgia  broker  is  author- 
ized to  draw  a  bill  against  the  manufacturer  for  $10,000, 
to  be  paid  in  ninety  days. 

In  all  probabiUty,  the  Georgia  broker  bought  the  cotton 
with  borrowed  money,  and  he  cannot  wait  until  the  ninety 
days  have  elapsed  before  he  gets  his  money.  Under  the 
present  banking  system,  it  is  easy  for  him  to  secure  the 
funds  with  which  to  pay  his  own  debts.  (This  he  does  by 
writing  to  the  Massachusetts  manufacturer,  ordering  him 
to  pay  some  party,  let  us  say  a  banker  in  Georgia,  $10,000 


214  DESCRIPTION  OF  INDUSTRY 

at  the  expiration  of  the  ninety  days  agreed  upon.  J  This 
letter  is  what  is  called  a  merchant's  draft  and,  like  a  check 
or  a  banker's  draft,  has  a  definite  form.  The  merchant's 
draft  is  "  accepted  "  by  the  manufacturer  in  Massachusetts; 
that  is  to  say,  he  writes  the  word  "accepted"  and  his  name 
on  the  face  of  the  draft.  This  acceptance  makes  the  draft 
mercantile  paper.  It  is  an  acknowledgment  on  the  part 
of  the  Massachusetts  manufacturer  that  he  owes  the 
Georgia  broker  the  amount  named.  This  draft,  properly 
accepted,  is  then  taken  by  the  Georgia  broker  to  liis  local 
bank.  The  banker  gives  to  him  the  amount  of  money 
named,  or  carries  this  amount  to  the  checking  account  of 
the  broker,  less  the  interest  which  accrues  on  the  $10,000 
for  ninety  days.  If  we  assume  the  discount  to  be  at  5%, 
the  Georgia  broker  will  receive  from  his  banker  $9,875. 
The  banker,  on  his  part,  will  carry  this  debt  for  three 
months,  when  the  Massachusetts  manufacturer  will  pay 
the  face  of  the  debt;  that  is  to  say,  $10,000. 

(Or  it  may  be  that  a  Massachusetts  bank  will  furnish 
the  funds  for  payment.)  In  this  case,  the  manufacturer 
will  take  the  accepted  bill  to  his  home  bank  and  receive 
in  exchange  for  it  a  draft  for  the  payment  of  his  debt  to 
the  cotton  broker.  In  either  case,  it  is  a  bank  that  carries 
the  indebtedness  for  ninety  days. 

If  now,  we  can  picture  to  ourselves  that  every  step  in 
the  journey  of  goods  from  the  original  producer  of  the 
raw  material  to  the  final  consumer  of  the  completed 
product  involves  a  transaction  Uke  the  one  described 
above,  we  can  understand  what  is  meant  by  saying  that 
the  banking  system  of  the  country  stands  at  the  center 
of  the  market,  and  that  practically  every  mercantile  pur- 
chase and  sale  involves  a  loan  or  discount  exchange.    In 


THE  CREDIT  SYSTEM  OF  EXCHANGES    215 

the  case  of  a  banker's  draft,  the  person  who  wishes  to 
make  use  of  the  credit  of  the  banker  for  the  payment  of  a 
debt  is  obliged  to  pay  for  the  use  of  this  credit;  that  is  to 
say,  he  pays  when  he  gets  the  draft  something  more 
than  the  face  of  the  draft.  In  the  case  of  the  mercantile 
draft,  on  the  other  hand,  the  profit  to  the  banker  arises 
out  of  the  loan  of  banking  funds  to  the  man  who  buys 
the  goods.  Were  it  not  that  banks  were  ready  at  all  times 
to  lend  their  funds  directly,  or  to  discount  mercantile  bills, 
the  buying  and  selling  of  goods  on  the  market  would  be 
seriously  hampered.  The  bank  not  only  supplies  facilities 
for  making  payments  of  debts  through  the  sale  of  the 
credit  which  they  maintain  in  different  parts  of  the  coun- 
try, but  they  make  use  of  their  credit  for  the  prompt  pay- 
ment to  the  seller  of  the  goods,  even  though  the  goods 
were  sold  on  thirty,  sixty,  or  ninety  days'  time.  Through 
the  discounting  of  mercantile  paper,  the  banks  of  the 
country  carry  the  value  of  all  goods  while  on  their  journey 
from  the  producer  to  the  consumer.  Very  Uttle  actual 
money  is  used  in  this  transfer  and,  for  this  reason,  dis- 
count banking  may  be  properly  regarded  as  an  important 
factor  in  facilitating  the  exchange  of  goods. 


CHAPTER  XII 
SHARING  THE  PRODUCT 

"If  the  identical  goods  were  directly  and  immediately  divided 
among  those  who  take  part  in  their  production,  the  matter  would  be 
comparatively  simple." — Seager. 

No  description  of  the  business  world  would  be  complete 
without  a  consideration  of  the  manner  in  which  the  com- 
mon product  of  co-operative  work  is  shared  among  the 
workers.  To  explain  how  this  is  done,  under  the  indus- 
trial, political,  and  social  conditions  of  our  time,  is  the 
purpose  of  the  present  chapter. 

§  51.  Statement  of  the  Question. — ^A  rapid  survey  of 
some  of  the  facts  thus  far  disclosed,  will  aid  in  a  statement 
of  this  question.  We  have  learned  from  the  foregomg 
chapters  what  is  meant  by  saying  that  all  goods  are  the 
product  of  co-operative  work.  We  have  come  to  appre- 
ciate that  we  are  dealing  with  an  industrial  society  com- 
posed of  an  organized  body  of  workers,  and  not  with  in- 
dividual workers.  We  have  come  to  understand  that  the 
total  output  of  a  week,  a  month,  or  a  year,  is  increased 
because  workers  use  machinery  and  submit  to  the  disci- 
pline of  an  efficient  organization.  We  know  that,  for  this 
reason,  the  per  capita  product  is  much  greater,  perhaps 
four  or  five  times  greater,  than  it  would  have  been  had 
each  worker  worked  with  tools  and  by  himself.  It  is 
these  facts  that  make  the  problem  of  sharing  the  product 
such  a  diflficult  problem,  for  no  one  has  yet  devised  a 
means  of  measuring  the  productivity  of  any  particular 

216 


SHARING  THE  PRODUCT  217 

worker  or  class  of  workers,  in  an  industry  adjusted  to  the 
requirements  of  the  principle  of  di\dsion  of  labor. 

Other  lessons  there  are  which  have  a  direct  bearing  on 
the  problem  in  hand. 

We  have  learned  that  all  goods  pass  through  the  market 
many  times  before  they  finally  lodge  in  the  hands  of  him 
for  whom  they  were  made,  and  that  the  law  of  demand 
and  supply  controls  their  sale  and  distribution.  We  have 
learned  that,  according  to  the  system  of  law  under  which 
we  live,  men  are  permitted  to  own  land  and  capital,  and 
to  loan  them  out  for  use  in  the  process  of  production. 
We  have  learned  that  all  workers  stand  as  freemen  before 
the  law,  and  that  they  will  not  work  except  in  response  to 
an  adequate  motive.  And  finally,  we  have  learned  that 
our  industrial  organization,  except  so  far  as  it  is  under 
the  direct  control  of  government,  is  held  together  by 
contracts  and  agreements,  and  that  these  contracts  and 
agreements  are  entered  into  voluntarily  by  all  parties 
concerned.  All  these  facts  must  be  accepted  as  conditions 
in  a  study  of  the  process  by  which  the  industrial  product 
is  shared. 

To  the  above  lessons  there  must  be  added  a  new  fact. 
Our  study  of  the  production  and  sale  of  goods  does  not 
complete  the  analysis  of  what  may  be  termed,  the  circle 
of  industry.    Up  to  the  present  point  in  our  study,  we 
have  assumed  that  circle  to  be: 
wants  lead  to  work, 
work  produces  goods,  and 
goods  when  sold  and  consumed  give  the  satisfac- 
tion of  the  wants  that  caused  the  work. 
This  seems  like  a  closed  circle,  but  it  leaves  out  one  im- 
portant fact;  namely,  the  fact  that  consumption  means 


218  DESCRIPTION  OF  INDUSTRY 

men,  women,  and  children  eating,  wearing  and  using  the 
various  kinds  of  goods  that  are  produced,  and  that  such 
consumption  cannot  take  place  until  consumers  are  given 
a  property  in  the  things  to  be  consumed.  It  may  be  said 
that  workers  secure  goods  as  their  property  when  they 
buy  them  on  the  market.  This  is  true  but  it  does  not 
answer  the  question  raised.  How  do  they  obtain  the 
money  with  which  to  buy;  and  who  or  what  decides  on 
1^  the  amount  of  money  each  is  to  have?  The  problem  of 
sharing  the  product  thus  comes  to  be  a  study  of  personal 
incomes.  What  fixes  wages?  What  determines  profits? 
How  does  the  rent  of  a  particular  piece  of  property  come 
to  settle  at  a  certain  figure?  What  makes  the  rate  of 
interest?  These  are  the  kinds  of  questions  covered  by  a 
correct  statement  of  the  problem  of  sharing  the  industrial 
product. 

(^We  have  expressed  our  problem  in  terms  of  money,  but 
the  amount  of  money  one  gets  is  of  slight  importance 
until  one  knows  what  he  can  buy  with  his  money.  ]  This 
leads  to  a  distinction  between  real  wages  and.jadminal 
wages,  real  profits  and  nominal  profits,  and  the  same  is 
true  of  all  incomes.  The  money  wages  in  a  country  may 
be  high,  but  if  prices  are  also  high,  the  real  wages  may  be 
low.  However,  this  phase  of  the  topic  may  be  dropped. 
The  first  step  is  to  inquire  how  the  total  product  of  co- 
operative work  is  shared  by  the  co-workers,  their  re- 
spective shares  being  expressed  in  money  incomes.  We 
shall  confine  our  attention  to  this  first  step.  The  second 
step,  namely,  the  effect  of  current  changes  in  the  market 
price  of  goods  on  the  standard  of  living  of  the  various 
classes  that  receive  these  various  incomes,  would  carry 
us  beyond  the  purpose  of  this  book.    Our  statement  of 


SHARING  THE  PRODUCT  219 

the  question,  therefore,  is  limited  to  the  determination 
Qf  money  incomes. 

§  52.  The  Production  Contract. — One  who  knows  the 
business  world,  is  familiar  with  the  fact  that  most  men 
judge  of  their  incomes  by  comparison  with  incomes  that 
others  receive.  The  bricklayer  compares  his  wages  with 
the  wages  of  the  plumber;  the  plumber  compares  what 
he  earns  with  the  profit  made  by  the  keeper  of  a  corner 
grocery;  the  merchant  grocer  compares  his  income  with 
the  salary  of  a  preacher,  or  a  teacher;  these  in  their  turn 
compare  their  salaries  with  the  fees  charged  by  lawyers 
and  physicians,  and  so  throughout  the  list.  This  is  not, 
perhaps,  a  bad  way  to  set  up  a  relative  test  of  the  incomes 
which  come  to  the  various  groups  of  workers;  but  it  is  no 
explanation  of  wages,  interest,  salaries,  fees,  or  profits. 
Universal  comparison  explains  nothing  unless  one  can 
find  an  income  somewhere  in  the  industrial  world  that 
rests  on  its  own  bottom,  and  which  can  be  used  as  a 
standard  with  which  to  measure  all  other  incomes.  It 
is  the  purpose  of  this  paragraph,  devoted  to  an  analysis 
of  what  is  termed  the  production  contract,  to  find  such 
a  standard. 

The  production  contract,  as  that  phrase  is  here  used, 
covers  the  conditions  under  which  industrial  or  business 
units  are  organized  for  the  purpose  of  the  production  and 
sale  of  goods.  The  direct  parties  to  the  production  con- 
tract  are, — the  enterpriser  or  responsible  business  man- 
ager; the  employee  whose  pay  comes  in  the  form  of  wages, 
fees,  salary,  or  commission;  and  the  capitalist  who  supplies 
the  money  necessary  for  starting  and  running  the  business. 
These  three  parties  stand  for  different  services,  all  of  which 
are  required  to  carry  on  a  business,  and  each  of  which 


220  DESCRIPTION  OF  INDUSTRY 

represents  an  interest  that  must  give  its  consent  before  a 
wheel  can  be  turned  or  an  order  accepted. 

The  responsible  member  of  every  business  created  by  a 
production  contract  is  the  enterpriser.  He  it  is  who  pro- 
motes the  enterprise.  He  seeksouTthe  line  of  production 
to  be  undertaken.  He  decides  on  all  formal  matters, 
such  as  the  kind  of  goods  to  be  handled,  the  amount  to 
be  produced,  and  the  market  for  their  sale.  He  calculates 
the  amount  of  money  needed  to  start  the  business  and  to 
carry  it  on.  He  bargains  with  the  capitalist  for  the  price 
to  be  paid  for  the  use  of  capital,  and  with  the  various 
classes  of  employees  for  the  price  to  be  paid  for  their 
services.  Under  the  modern  method  of  doing  business,  the 
pay  for  both  capital  and  labor  is  determined  before  pro- 
duction is  begun.  It  is  agreed  upon  and  expressed  in  the 
production  contract.  The  enterpriser,  on  the  other  hand, 
does  not  know,  until  the  work  is  done  and  the  goods  are 
sold,  what  hisjgay  will  be.  He  agrees,  under  this  contract, 
to  stand  the  loss  if  loss  there  be,  and  the  other  parties  to 
the  contract  agree  to  give  him  the  gain  or  profit  if  the  enter- 
prise proves  to  be  commercially  successful. 

From  the  foregoing  it  is  clear  that  the  responsible  man- 
ager stands  for  the  interest  that  has  the  last  word  in  form- 
ing a  production  contract.  Neither  the  employee  nor  the 
capitalist  is  obliged  to  think  about  the  probable  success 
of  the  business.  Each  demands,  in  wages  or  in  interest, 
all  he  has  the  face  to  ask,  leaving  it  for  the  responsible 
manager  to  beat  down  these  demands  to  a  reasonable 
figure,  and  for  him  the  word  reasonable  has  a  commercial 
basis.  It  is  his  peculiar  task  to  analyze  costs  and  to  keep 
the  cost  of  production  below  the  price  at  which  the  prod- 
uct can  be  sold.      And  this  he  will  do  for  the  reason  that 


SHARING  THE  PRODUCT  221 

it  is  this  margin  between  cost  and  price  which  measures 
the  profit  that  he  receives  as  his  personal  income.  It  is, 
of  course,  true  that  every  citizen  in  the  business  world 
desires  to  have  as  large  an  income  as  possible,  but  the 
enterpriser  is  in  a  peculiar  situation.  He  is  the  only  in- 
dustrial agent  whose  income  depends  on  keeping  the  costs 
of  production  as  low  as  possible.  He  alone  feels  the  force 
of  competition  in  production,  and  it  is  he  alone  whose  de- 
cisions are  controlled  by  the  fact,  that  an  agreement  to 
pay  too  high  wages  or  too  high  interest  will  lead  to  the 
failure  of  the  business  placed  in  his  charge.  By  virtue 
of  his  position,  he  is  forced  to  be  the  keeper  of  the  door 
of  industrial  opportunity,  and  to  bestow  the  rewards  for 
industrial  service. 

The  production  contract  is,  in  fact,  the  assembling  of 
two  classes  of  contracts,  the  one  pertaining  to  wages  and 
the  other  to  interest,  and  the  enterpriser  is  a  party  to 
the  contracts  of  both  classes.  He  is  on  this  account  in  a 
position  to  compare  the  various  factors  of  cost,  and  to 
select  such  a  combination  for  the  organization  of  the  busi- 
ness placed  in  his  charge  as  will  reduce  the  production 
cost  to  a  minimum.  It  is  this  selection  on  the  part  of  the 
responsible  manager  that  places  a  limit  upwards  to  both 
wages  and  interest.  (  The  manager  is  forced  to  compare 
the  relative  efficiency  of  the  labor  element  and  of  the  cap- 
ital element  in  productionr\  It  is  by  this  comparison  that 
he  makes  for  himself  a  standard  with  which  to  measure 
what  he  is  willing  to  pay.  He  will  not  pay  more  to  labor 
than  it  would  cost  if  he  borrowed  capital  with  which  to 
buy  machinery  to  do  the  same  amount  of  work;  nor  will 
he  pay  more  in  interest  than  it  would  cost  if  he  hired 
laborers  to  do  the  same  amount  of  work  by  hand. 


222  DESCRIPTION  OF  INDUSTRY 

In  this  comparison,  which  is  made  daily  and  by  thou- 
sands of  different  managers  in  all  kinds  and  sorts  of  busi- 
ness, do  we  find  the  measure  of  the  maximum  basal  wages 
that  laborers  can  reasonably  expect,  and  the  measure  of 
the  maximum  rate  of  interest  that  capitalists  feel  free 
to  demand.  The  basal  wage  and  the  average  interest 
will  tend  to  settle  at  points  where  it  is  a  matter  of  indiffer- 
ence to  the  manager  whether  he  hires  laborers  or  borrows 
capital.  The  kind  of  competition  that  controls  the  dis- 
tribution of  the  product,-  is  the  competition  between 
labor  and  capital  for  acceptance  by  the  responsible  man- 
ager in  his  organization  of  a  business.  He  considers 
the  offer  of  each  as  a  potential  cost,  and  accepts  the  one 
which  he  estimates  to  be  relatively  more  effective  in  pro- 
ducing profit.  It  is  this  estimate  that  fixes  the  standard 
on  which  the  wage  scale  rests.  We  find  here  the  bed- 
rock of  our  problem.  With  the  basal  wage,  the  average 
interest,  and  the  normal  profits  as  bench  marks,  we  may 
run  levels  throughout  the  entire  business  world,  and  by 
means  of  comparison  explain  every  phase  and  form  of  in- 
come. 

From  the  foregoing  explanation,  one  might  conclude 
that  the  responsible  manager  is  able  to  fix  his  own  income 
at  any  figure  he  sees  fit;  but  such  a  conclusion  would  be 
incorrect.  The  amount  which  an  enterpriser  can  pay  to 
himself  in  the  form  of  profit  is  limited  in  two  ways.  In 
the  first  place,  it  is  limited  by  the  fact  that  no  single 
establishment  produces  all  the  goods  of  a  particular  sort, 
I  and  nompetitionbetween  different  producers,  or  between 
different  classes  of  goods,  will  keep  the  price  down  to  the 
cost  of  their  production,  including  a  normal  profit.  In 
the  second  place,  the  fact  that  every  citizen  of  the  business 


SHARING  THE  PRODUCT  223 

world  is  at  liberty  to  try  his  hand  at  any  and  every  occupa- 
tion, results  in  the  establishment  of  a  rate  of  pay  that  is 
accepted  as  normal  for  every  class.  ^If  the  laborer  or 
the  capitalist  does  not  like  the  wages  or  the  interest  , 
offered  by  the  responsible  manager,  they  have  the  right, 
either  jointly  or  separately,  to  organize  a  business  of  their 
own,  and  to  become  themselves  responsible  managers^ 
Under  such  conditions,  any  attempt  on  the  part  of  a  man- 
ager to  squeeze  wages  or  interest  below  their  commercial 
rating,  will  result  in  his  giving  way  to  some  one  else,  pos- 
sibly some  one  who  comes  up  from  the  ranks  of  labor, 
who  is  able  to  compute  cost  and  estimate  price  with  greater 
accuracy.  The  responsible  manager  seems  to  be  the  dic- 
tator of  his  own  income;  in  fact,  a  limit  is  set  to  his  in- 
come by  commercial  conditions.  This,  at  least,  is  the 
tendency  in  a  free  and  open  market. 

We  find,  then,  in  the  terms  of  the  production  contract, 
the  basis  or  standard  from  which  all  other  incomes  are 
measured. 

§  53.  The  Secondary  Distribution  Groups. — ^The  ag- 
gregate product  of  joint  work  is  shared  among  four  groups 
or  classes  of  incomes.  The  first  of  these,  which  we  call 
the  primary  commercial  incomes,  embraces  all  incomes 
covered  by  the  production  contracts.  The  wages  and 
salaries  of  employees  engaged  in  direct  production,  the 
interegt  on  capital  used  in  production,  and  the  normal 
profiL-to  the  responsible  manager,  are  all  commercial 
incomes.  They  differ  from  other  incomes  in  that  they 
constitute  production  expenses  and  together  make  up  the 
cost  by  which  normal  prices  on  the  open  market  are  deter- 
mined. The  other  groups  of  income  are  incomes  derived 
from  direct  services,  incomes  derived  from  rents,  and 


224  DESCRIPTION  OF  INDUSTRY 

speculative  and  monopoly  incomes.  These  three  groups 
of  incomes  are  distinguished  by  the  fact  that  they  do  not 
enter  into  cost;  they  are,  however,  closely  related  to 
commercial  incomes  to  which  they  must  be  referred  for 
the  purpose  of  explanation. 

(a)  Incomes  Derived  from  Direct  Services. — ^The  sal- 
aries and  wages  paidjLo_goyermnent^  employees  are  in- 
comes of  this  class.  The  government  is  not  a  commercial 
corporation,  nor  are  the  services  which  it  renders  such  as 
can  be  bought  and  sold  on  a  competitive  market.  It 
gives  protection  to  persons  and  property:  it  is  responsible 
for  the  enforcement  of  contracts;  and  it  imdertakes  to 
provide  for  public  health,  public  recreation,  public  educa- 
tion, and  other  like  services.  On  its  formal  side,  however, 
government  is  the  men  who  govern.  These  men  have 
wants  that  must  be  satisfied  the  same  as  other  workers 
who  work  for  the  production  of  goods  to  be  sold  on  the 
market.  This  means  that  a  certain  amount  of  the  joint 
product  of  current  industry  must  be  set  aside  for  the  sup- 
port of  the  servants  of  the  state. 

In  modem  society,  the  income  of  the  government  which 
it  distributes  as  salaries  and  wages  to  public  employees, 
and  as  payments  for  needed  materials  and  supplies, 
arises  from  taxation.  The  significant  fact  is  that  the 
(public  income  must  just  equal  public  expenditure.  )  There 
is  neither  profit  nor  loss.  Its  amount  is  determmed  by 
political  and  not  by  industrial  methods.  The  fixing  of 
the  income  of  the  state  is  not  an  industrial  act.  The 
making  of  contracts  and  the  control  exercised  by  indus- 
trial competition  has  nothing  directly  to  do  with  the 
fixing  of  the  tax  fund  out  of  which  the  wages  and  salaries 
of  public  employees  are  paid.  (On  the  contrary,  the  size 


SHARING  THE  PRODUCT  225 

of  the  fund  is  fixed  by  the  wages  and  the  salaries 
paid.  ^ 

If  tne  wages  and  salaries  of  public  officials  are  not  the 
result  of  a  commercial  bargain,  what  is  the  consideration 
by  which  they  are  determined?  The  answer  is  simple. 
They  are  determined  by  means  of  constant  comparison 
with  fioTTiTnercial  incomes.  The  employees  of  the  state 
cannot  get  more,  nor  will  they  accept  less,  than  the 
standard  pay  for  similar  work  performed  by  men  of  similar 
skill  in  the  business  world  outside  the  government  serv- 
ice. Considerations  of  the  honor  that  comes  with  a  public 
office,  the  kind  of  work,  and  the  like,  may  influence  the 
final  result;  but  that  which  controls  is  the  comparison 
that  public  employees  are  constantly  making. 

Many  others  there  are,  besides  our  public  servants, 
whose  pay  is  fixed  by  comparison  with  commercial  in- 
comes. The  preacher^  the  teacher,  the  lawyer  (if  in  gen- 
eral practice),  the  physician,  and  all  workers  engaged 
in  domestic  service,  find  the  explanation  of  what  they 
receive  in  the  fees,  salaries,  and  wages  paid  conmierdal 
workers.  A  description  of  the  ways  in  which  this  comes 
about  will  make  clear  the  connection. 

In  the  first  place,  comparison  implies  the  possibility  of 
shifting  employment.  The  teacher  compares  his  salary 
with  what  his  neighbor,  an  insurance  agent,  gets,  because 
he  can  readily  become  an  insurance  agent  if  the  school 
board  will  not  raise  his  salary.  A  lawyer  compares  his 
fees  with  the  income  of  a  business  manager,  because  he 
feels  he  has  the  qualifications  to  run  a  business  success- 
fully. Domestic  cooks  compare  their  wages  with  what 
the  "hands"  can  get  in  a  down  town  factory,  because 
they  know  they  can  find  employment  in  the  factory. 


226  DESCRIPTION  OF  INDUSTRY 

The  significance  of  comparison  in  the  adjustment  of 
salaries  and  wages  for  those  who  live  by  direct  service, 
rests  on  the  universal  right  of  contract  guaranteed  to 
every  citizen  by  our  fundamental  law. 

In  the  second  place,  these  incomes  derived  from  direct 
/^  RprviWj^,fp!  paid  f>ut  of  other  incomes,  and  the  amount  so 
paid  is  limited  by  the  market  demand  for  the  service  in 
question.  What  one  pays  for  coal  he  cannot  spend  with 
a  dentist.  What  one  pays  to  his  dentist  he  cannot  spend 
in  buying  coal:  what  one  spends  on  theaters  and  con- 
certs he  cannot  use  in  buying  clothes.  This  means  that 
direct  services  are  properly  regarded  as  marketable  goo^s, 
/and  as  such  come  into  competition  with  other  goods 
offered  for  sale.  )  It  is  this  competition  of  all  sorts  and 
kinds  of  goods,  for  the  favor  of  the  buyer,  that  settles  the 
amount  that  will  be  spent  for  direct  services;  it  is  the 
competition  of  the  various  kinds  of  employment  which 
work  through  the  comparison  above  referred  to  that 
settles  the  number  of  persons  who  are  willing  to  render 
direct  service:/ the  result  of  the  joint  action  of  these  two 
kinds  of  competition  is  to  fix  the  personal  income  of  all 
who  render  a  direct  service.) 

(b)  Incomes  Derived  from  Rents. — ^The  modern  busi- 
ness world  allows  the  private  ownership  of  land.  This 
fact  creates  a  land  owning  interest  which  must  be  con- 
sulted, and  whose  consent  must  be  obtained,  before  in- 
dustries can  find  standing  ground,  or  secure  material  and 
power,  for  purposes  of  manufacture.  The  necessity  of 
that  consent  is  the  basis  of  the  claim  of  the  landowner 
for  a  share  in  the  product  of  current  industry.  The  rent 
principle  extends  to  other  things  than  land,  but  what 
follows  is  confined  to  land  rentals. 


SHARING  THE  PRODUCT  227 

From  the  point  of  view  of  income,  the  landowner  stands 
in  a  class  by  himself.  Although  he  controls  a  factor  of 
production  that  is  limited  in  amount,  he  is  QQiL_a  monop- 
olist.  The  price  of  agricultural  goods  is  determined  by 
tHecost  of  production  where  they  cost  the  most,  and  those 
lands  that  permit  production  at  a  less  costoear  a  rent. 
To  receive  this  rent  as  a  personal  income  is  the  condition 
on  which  the  owner  of  the  land  permits  it  to  be  used.  The 
income  of  the  landlord,  then,  is  built  out  of  the  difference 
between  what  it  costs  to  produce  agricultural  goods  on 
his  land,  and  what  it  costs  on  land  where  there  is  no  rent; 
that  is  to  say,  on  land  where  the  cost  makes  the  price. 
He  cannot  get  more,  nor  can  he  receive  less.  The  different 
amounts  of  rent  which  different  landlords  receive  vary 
with  the  different  commercial  grades  of  land. 

It  is_said__that  rent  does  not  enter  into  cost.  This  is 
true.  The  price  of  corn  would  not  fall  if  all  owners  of 
land  should  give  up  their  rent.  This  is  a  most  important 
fact  in  our  explanation  of  the  sharing  of  the  product  of 
current  industry.  The  question  of  how  much  is  to  be 
taken  as  rent  is  never  considered  in  the  production  con- 
tract. The  owner  of  the  land  is  not  a  party  to  that  con- 
tract. Those  who  are  concerned  in  producing  crops  on 
the  poorest  land,  that  is  to  say,  the  land  where  there  is 
no  rent,  are  obliged  to  bargain.  They  are  obliged  to  agree 
as  to  the  wages  and  the  interest,  and  the  estimated  profit; 
but  the  rent,  where  there  is  any  rent,  comes  to  the  owner 
of  the  land  out  of  the  market  price  over  and  above  the 
cost  of  production  on  the  superior  land. 

While,  therefore,  the  consent  of  the  landowner  to  the 
use  of  his  land  must  be  gained  before  it  can  be  used  for 
production, /the  amount  paid  for  this  consent  is  not  a 


228  DESCRIPTION  OF  INDUSTRY 

matter  of  commercial  bargain.  J  Those  who  cultivate  his 
land  will  pay  him  all  profit  over  and  above  normal  profit. 
Nothing  that  the  landowner  can  say  or  do  has  the  least 
influence  on  the  bargains  that  give  to  the  business  world 
its  standards  for  normal  wages,  normal  interest  and 
normal  profits.  Indeed,  the  landlord  is  not  a  commercial 
agent.  He  is  merely  an  owner.  The  competition  of 
enterprisers  forces  a  certain  amount  of  income  upon  him. 
He  cannot  increase  it;  he  cannot  reduce  it;  the  only  thing 
he_caii_4ojs_to_acc^t  it.  This  would  be  equally  true  if 
the  government  should  own  the  land.  The  rental  income 
accrues  to  the  owner  by  virtue  of  ownership.  Its  amount 
is  the  result  of  competition  for  the  opportunity  of  using 
different  grades  of  land  productively. 

(c)  Speculative  and  Monopoly  Incomes. — Speculative 
and  monopoly  incomes  are  the  distribution  to  individuals 
of  speculative  and  monopoly  profits.  These  come  into 
existence  because,  for  some  reason,  the  force  of  com- 
petition is  not  able  to  reduce  the  price  for  which  goods 
are  sold  to  the  cost  of  their  production.  These  profits 
are  profits  over  and  above  the  normal  profit  as  determined 
by  the  production  contract.  It  is  the  constant  effort  of 
competition  to  kill  speculative  and  monopoly  profits; 
but  so  long  as  speculative  and  monopoly  profits  exist, 
they  claim  and  they  receive  a  share  of  the  current  product. 

The  relation  of  incomes  of  this  group  to  the  industrial 
process  may  be  indicated  by  two  remarks  respecting  them. 

In  the  first  place,  these  incomes,  like  rent,  form  no 
part  of  the  cost  of  production,  and,  for  this  reason,  have 
no  bearing  on  those  commercial  forces  by  which  the 
standards  of  pay  for  laborers,  capitalists  and  enterprisers 
are   determined.      They   who   receive   speculative    and 


SHARING  THE  PRODUCT  229 

monopoly  incomes  do  not,  like  those  who  render  direct 
services,  test  their  incomes  by  comparison  with  commercial 
incomes,  nor  will  they  leave  an  occupation  because  their 
speculative  or  monopoly  income  is  not  as  high  as  they 
desire.  This  group  of  incomes  are  "all  velvet."  They 
stand  for  excess  profits  over  normal  profits. 

In  the  second  place,  the  industrial  principles  which  fix 
speculative  and  monopoly  profits  have  to  do  with  the 
marketing  and  not  the  making  of  goods.  These  incomes 
are  called  into  existence  by  the  fact  that  the  avenues  of 
supply  are  in  some  way  controlled,  and  that  a  smaller 
quantity  of  goods  are  permitted  to  come  on  the  market 
than  would  be  bought  if  the  price  were  reduced  to  the 
cost  of  production.  Whether  or  not  it  is  wise  to  permit 
these  classes  of  income  to  continue,  either  in  whole  or  in 
part,  is  not  for  us  to  consider  at  this  time;  nor  is  it  for  us 
to  ask  how  they  could  be  squeezed  out,  were  such  a  result 
desirable.  (They  exist  because  competition  does  not  work 
its  normal  results.)  They  are  a  market  fact  and  not  a  fact 
of  production.  We  have  learned  our  lesson  respecting 
them  when  we  see  how  they  come  about,  and  that  they 
represent  profits  over  and  above  the  normal  profits  which 
make  a  part  of  the  cost  of  production.  They  are  justified, 
if  at  all,  because  they  are  necessary  to  induce  enterprisers 
to  take,  unusual  risks.^ 

§  54.  Summary  of  the  Analysis. — It  is  sometimes  said 
that  the  demand  for  labor  as  compared  with  its  supply 
fixes  wages,  and  that  the  demand  for  capital  as  compared 
with  its  supply  fixes  the  rate  of  interest.  These  state- 
ments are  at  best  superficial  truths.  They  shed  no  light 
on  the  process  by  which  current  products  are  shared. 
They  assume,  what  is  not  true,  that  wages  are  fixed  inde- 


230  DESCRIPTION  OF  INDUSTRY 

pendently  of  interest,  and  that  interest  is  fixed  inde- 
pendently of  wages,  and  that  both  wages  and  interest 
are  fixed  independently  of  what  the  market  is  willing  to 
allow  as  a  reasonable  rate  of  profit.  No  decrease  in  the 
supply  of  labor  could  permanently  raise  wages  above  the 
point  at  which  the  introduction  of  better  machinery  would 
result  in  a  higher  profit;  while  an  increase  in  the  supply 
of  labor,  except  it  be  labor  of  inferior  quality,  is  itself 
an  invitation  for  the  building  of  new  capital  with  which  to 
employ  it  in  the  most  efficient  manner.  It  is  quite  pos- 
sible that  a  shortage  in  the  supply  of  a  particular  group 
of  workers  would  permit  the  members  of  that  group  to 
obtain,  for  a  time,  wages  higher  than  the  commercial 
wage.  This  would  mean  the  temporary  depression  of 
profit  in  the  industry  concerned.  It  could  not  continue. 
A  powerful  trades  union,  also,  provided  its  numbers  are 
comparatively  small,  might  force  wages  above  the  com- 
mercial wage.  This  would  mean  a  rise  in  the  price  of 
the  goods  produced  by  them  and  a  corresponding  de- 
pression in  the  real  income  of  other  workers  who  consume 
these  goods.  That  is  to  say,  a  trades  union  when  it  acts 
in  this  way  is  a  monopolist,  and  secures,  under  the  guise 
of  wages,  what  is,  in  fact,  a  monopoly  income.  But  when 
one  has  recited  all  the  possible  exceptions,  he  is  obliged 
to  return  to  this  truth,  that  the  analysis  of  cost  determines 
the  standard  by  which  all  kinds  and  sorts  of  income  are 
measured. 

We  are  now  in  a  position  to  describe  concisely  the 
process  by  which  the  product  of  current  industry  is  shared 
among  industrial  workers.  (^The  basal  wage,  the  average 
interest,  and  the  normal  profiy  are  first  evolved,  out  of  the 
necessity  imposed  on  these  three  interests  to  come  to- 


SHARING  THE  PRODUCT  231 

gether  and  to  agree  on  a  business  program.  They  are 
obliged  to  co-operate  or  the  industrial  process  cannot  go 
on.  The  limit  of  what  any  or  all  of  these  three  interest? 
can  get  as  an  income  is  set  by  what  the  market  is  willing 
to  allow  for  the  kind  of  goods  produced.  This  is  tested 
out  by  the  experience  of  thousands  of  production  con- 
tracts. As  a  result,  certain  well-recognized  standards 
emerge  from  the  trial,  so  that  the  business  world  comes 
to  know  what  is  the  basal  wage,  the  average  interest,  or 
the  normal  profit. 

These  standards  having  been  established,  the  second 
step  in  the  explanation  of  the  process,  is  to  recognize  that 
(services  which  are  non-commercial  in  character  are  ad- 
justed by  comparison  with  services  that  are  commerciaU 
The  salaries  of  government  employees  are  fixed  by  com- 
parison with  what  such  employees  could  get  if  they  should 
go  into  business.  In  the  same  way  the  salaries  of  preach- 
ers, and  teachers,  and  the  fees  of  physicians  and  lawyers 
are  checked  against  what  men  of  this  training  and  talent 
could  get  in  the  services  of  corporations  engaged  in  business. 

The  third  step  is  to  recognize  that  speculative  and 
monopoly  incomes  are  built  out  of  sales  at  prices  in  excess 
of  the  cost  of  production.  In  a  sense,  they  are  predatory 
incomes,  for  what  speculators  and  monopolists  get  is  a 
loss  to  those  who  buy  their  goods.  In  a  strictly  upright 
business  world  all  goods  will  be  sold  at  their  cost. 

The  rent  income,  as  already  explained,  rests  on  the 
fact  that  land  is  limited,  and  that  such  land  as  is  used 
industrially  is  of  different  grades.  We  have  here  a  per- 
manent share  in  the  current  product,  and  as  long  as 
private  property  in  land  continues,  rent  will  be  a  per- 
manent personal  income. 


CHAPTER  XIII 
BUSINESS  INTEGRATION 

"Self-governing  groups  of  men  should  be  enabled  to  work  together 
in  perfect  harmony  and  on  a  great  scale." — John  Fiskb. 

The  system  of  law  and  business  custom  under  which 
industry  is  carried  on  makes  extensive  use  of  voluntary 
association.  This  phrase  stands  for  all  contracts,  agree- 
ments, understandings,  associations,  and  organizations 
by  which  men  are  bound  together  and  act  in  business 
matters  more  or  less  as  a  unit.  Partnerships,  corporations, 
employers'  associations,  trade  unions,  sales  agreements, 
and  the  like,  are  illustrations  of  voluntary  business  as- 
sociation. To  describe  all  the  agencies  of  business  in- 
tegration, and  to  show  the  pecuUar  character  of  each,  goes 
far  beyond  the  purpose  of  the  present  chapter.  Our  task, 
much  more  simple,  is  to  gain  a  clear  impression  of  the 
fact  that  business  men  are  coming  to  act  as  groups  rather 
than  as  individuals. 

A  complete  description  of  the  agencies  employed  for 
this  purpose  would  require  a  detailed  analysis  of: 

The  business  units, 

Marketing  agreements,  and 

Organizations  for  bargaining. 
The  analysis  that  follows  is  confined  to  the  first  and  third 
of  the  classes  of  agencies  named.  This  does  not  mean  that 
marketing  agreements  are  of  no  importance.  On  the 
contrary,  they  furnish  perhaps  the  most  serious  of  all 
criticisms  on  the  manner  in  which  industrial  freedom 

232 


BUSINESS  INTEGRATION  233 

works.  One  sees  everywhere  an  effort  on  the  part  of  busi- 
ness men  to  elude  the  control  of  competition.  Hundreds 
of  schemes  for  attaining  this  end  have  been  tried  with 
varying  degrees  of  success.  To  describe  them  would  re- 
quire a  book.  This  phase  of  integration  in  the  business 
world  is  set  aside,  with  the  assurance,  however,  that  the 
lesson  which  it  is  the  design  of  the  present  chapter  to 
teach  will  be  amply  presented,  by  a  study  of  the  organiza- 
tion of  business  units  and  of  organizations  for  bargaining. 

§  65.  Business  Units.  The  sunplest  of  all  business 
units  is  an  individual  doing  business  by  himself.  He  fur- 
nishes the  capital;  he  is  the  sole  manager;  he  assumes  all 
the  risk  and  receives  all  the  profits.  As  a  matter  of  fact, 
however,  only  a  small  part  of  modem  business  is  carried 
on  in  this  simple  manner.  Since  machinery  came  into 
existence,  and  since  railways  and  steam  transportation 
have  created  a  world's  market,  the  size  of  industries  has 
greatly  increased.  But  great  industries  call  for  more 
capital  than  an  individual  is  commonly  able  to  supply. 
This  fact  makes  it  necessary  for  capitalists  to  unite  their 
funds  for  a  common  investment,  thereby  forming  different 
kinds  of  business  units,  each  of  which  has  a  character  of 
its  own. 

The  business  units  thus  formed  are  of  three  sorts;  part- 
nerships, corporations,  and  trust  or  holding  companies. 

(a)  Partnership. — A  partnership  is  an  agreement  en- 
tered into  by  two,  three,  or  more  persons  to  carry  on  busi- 
ness as  a  firm  rather  than  as  individuals.  The  firm  must 
have  a  name,  and  the  name  of  the  firm  must  be  used  in  all 
firm  transactions.  Suppose  two.  men,  we  will  call  them 
Mr.  Smith  and  Mr.  Jones,  enter  into  partnership  for  selling 
groceries.     The  bank  account  will  be  in  the  name  of 


234  DESCRIPTION  OF  INDUSTRY 

Smith  and  Jones.  All  bills  will  be  rendered  to  Smith  and 
Jones.  This  will  be  the  firm  name.  Should  others  be 
admitted  to  the  partnership,  the  firm  name  will  probably 
be  changed  to  Smith,  Jones  and  Company. 

There  are  as  many  kinds  of  partnerships  as  there  are 
kinds  of  contracts  by  which  these  small  business  units 
are  created.  Commonly,  the  profits  are  shared  in  pro- 
portion to  the  amount  of  capital  put  in  by  each  partner. 
It  may  be,  however,  that  one  partner  furnishes  the  skill 
and  business  experience,  while  the  other  furnishes  the 
money.  In  such  a  case,  this  skill  and  experience  will  be 
regarded  as  capital  in  the  division  of  the  profits.  It  may 
be  that  a  young  man  with  some  capital  desires  to  learn 
a  business  and,  although  he  is  taken  as  a  partner,  he  will 
not,  during  his  years  of  apprenticeship,  share  in  the  profits. 
Partners  may  or  they  may  not  pay  themselves  salaries 
out  of  the  proceeds  of  the  business  before  a  profit  is  de- 
clared. These,  and  many  other  modifications  are  possible; 
but,  whatever  the  terms  of  the  contract,  the  firm  stands 
on  the  street  as  a  business  unit. 

The  partnership  has  certain  characteristics  that  should 
be  noted.  In  the  first  place,  the  liability  of  the  partner- 
ship is  not  limited  to  the  amount  of  capital  which  each 
partner  put  into  the  business.  Should  a  firm  incur  a 
debt  and  the  business  be  unable  to  pay,  the  partners  of 
the  firm  will  be  obliged  to  pay.  What  is  called  "unlim- 
ited liability-'  applies  in  the  case  of  a  simple  partnership. 
The  fact  that  when  a  man  forms  a  partnership  with  other 
men  he  risks  more  of  his  property  than  he  puts  into  ths 
business,  goes  far  to  explain  why  partnerships  are  not 
favored  by  investors. 

Another  fact  of  some  importance  is  that,  from  the  point 


BUSINESS  INTEGRATION  235 

of  view  of  responsibility  and  control,  the  partnership  is  a 
loose  and  ineffective  sort  of  business  unit.  Each  partner 
has  a  right  to  have  his  say  in  every  detailed  question  that 
arises.  Under  such  conditions,  it  is  difficult  to  maintain 
a  consistent  policy.  This  is  an  element  of  weakness  as 
compared  with  other  forms  of  business  organization. 

The  lack  of  continuity  of  business  life,  also,  should  be 
mentioned.  This  is  of  special  importance  in  the  case  of 
great  industries.  Men  with  money  would  not  care  to 
invest  in  a  railway,  for  example,  if  the  continuance  of  the 
business  were  in  any  way  dependent  on  the  life  of  any 
particular  man  or  set  of  men.  This,  in  practical  effect 
at  least,  is  true  of  partnerships,  and  it  is  perhaps  the  chief 
reason  why  great  industries  seek  some  other  form  of  busi- 
ness organization. 

Partnerships  may  be  organized  with  limited  liability, 
which  means  that  for  some  of  the  partners,  liability  for  the 
debts  of  the  firm  is  limited  to  the  amount  of  capital  which 
they  invest.  Joint-stock  companies  are  another  phase  of 
organization  due  to  the  desire  to  overcome  the  weak  points 
in  simple  partnership.  But  a  full  understanding  of  all 
the  various  kinds  of  business  units  that  stand  between  the 
individual  on  the  one  hand  and  the  corporation  on  the 
other,  would  require  a  course  in  the  study  of  law.  They 
are  all  illustrations  of  voluntary  association.  They  all 
stand  for  the  integration  of  business  activity.  They 
all  fit  into  our  idea  of  co-operative  work.  All  that  has 
been  said  respecting  competition,  the  influence  of  a  desire 
for  profit,  and  the  like,  applies  to  business  units  of  this 
class  as  well  as  to  individuals. 

(b)  Corporations. — Corporations  are  a  form  of  business 
organization    especially   adapted    to    the    creation    and 


236  DESCRIPTION  OF  INDUSTRY 

management  of  great  industries.  They  are  business  units 
and  at  present  are  the  most  important  form  of  business 
integration.  They  are  created  by  law  and  stand  before 
the  law  as  persons.  They  are  sometimes  called  legal 
persons.  They  can  hold  property,  borrow  money,  sue 
and  be  sued,  and  exercise  most  of  the  business  rights  which 
the  law  confers  on  individuals. 

A  partnership  can  come  into  existence  by  means  of  a 
contract  between  partners.  A  corporation,  on  the  other 
hand,  must  be  created  by  the  state.  Originally,  when 
business  men  desired  to  form  a  corporation,  it  was  nec- 
essary for  them  to  go  to  the  Legislature  for  a  special  act 
giving  them  the  right  to  incorporate.  Experience  showed 
this  to  be  an  unnecessary  burden  on  business  enterprise. 
It  was  thought,  also,  that  the  right  to  incorporate  should 
be  made  general  and  that  the  step  leading  to  incorpora- 
tion should  be  as  simple  and  inexpensive  as  possible. 
These  considerations  led  to  the  enactment  of  general 
laws  of  incorporation,  by  which  any  set  of  men  who  so 
desire,  and  who  are  able  to  meet  the  conditions  laid 
down  by  the  law,  may  organize  a  business  enterprise  as  a 
corporation. 

The  responsible  partners  in  a  corporation  are  the  stock- 
holders; at  least,  such  is  the  theory.  These  furnish  the 
money  to  start  the  business.  According  to  common 
practice,  the  corporation  issues  a  certain  amount  of  stock, 
say  ten  thousand  shares  of  $100  each,  which  would  make 
a  stock  capitalization  of  $1,000,000.  This  money  is  spent 
by  the  corporation  in  the  purchase  or  the  construction 
of  a  business.  Every  stockholder  owns  what  is  called 
"an  imdivided  interest"  in  the  business  up  to  the  amount 
of  stock  he  holds.    For  example,  in  the  above  case,  a 


BUSINESS  INTEGRATION  237 

man  who  holds  one  thousand  shares  owns  an  undivided 
interest  in  one-tenth  of  the  property  of  the  corporation. 
He  does  not,  however,  own  any  particular  piece  of  the 
property.  A  stockholder  in  a  railway  corporation,  for 
example,  could  not  say  that  any  particular  rail  or  bridge 
belonged  to  him.  These  things  and  all  other  assets  belong 
to  the  corporation. 

The  stockholders  have  two  rights  by  virtue  of  being 
stockholders.  They  can  vote  for  the  Board  of  Directors, 
whose  duty  it  is  to  manage  the  business  or  to  appoint 
officers  for  that  management,  and  they  can  claim  as  a 
personal  asset  the  earnings  of  the  business.  These  earn- 
ings may  be  paid  to  the  stockholders  in  the  form  of 
dividends,  or  they  may  be  carried  by  the  corporation  as 
a  surplus.    But  the  stockholders  own  the  surplus. 

Not  all  of  the  capital  needed  by  a  large  business  is 
collected  by  the  sale  of  stocks;  the  issue  and  sale  of  bonds 
is  also  freely  practiced.  A  bond  is  a  promise  on  the  part 
of  the  corporation  to  pay,  say  $100  in  fifty  years  from  the 
date  of  issue,  and  the  added  promise  to  pay  annually 
interest  at  say  five  per  cent  until  the  principal  of  the  bond 
is  paid.  Technically  speaking,  a  stock  certificate  is  ev- 
idence of  proprietorship;  a  bond,  on  the  other  hand,  is 
evidence  of  an  obligation.  As  long  as  the  interest  is  paid, 
the  bondholder  has  no  voice  in  the  management  of  the 
property.  If,  however,  the  corporation  is  at  any  time 
unable  to  pay  the  interest,  the  courts  will  say  that  the 
corporation  has  failed,  and  give  the  property  over  to  the 
bondholders.  The  legal  process  is  to  us  a  matter  of  no 
importance.  The  point  is  that  corporations  collect  the 
fimds  with  which  to  build  and  carry  on  a  business  by  the 
issue  and  sale  of  stocks  and  bonds. 


238  DESCRIPTION  OF  INDUSTRY 

The  weakness  of  partnerships  as  business  units  for  large 
undertakings  is  in  a  large  degree  overcome  by  the  fact 
that  an  investor  in  a  corporation  is  liable  only  for  the 
amount  of  capital  which  he  invests.  The  theory  is  that  the 
corporation  owes  the  debts  which  it  incurs,  and  that 
these  debts  are  a  lien  on  the  assets  of  the  corporation. 
If  these  assets  are  used  up  in  paying  corporate  debts,  the 
stockholders'  stock  becomes  worthless;  but  the  personal 
property  of  the  stockholder  is  not  put  in  jeopardy  by  the 
failure  of  a  corporation  in  which  he  has  invested.  Under 
such  conditions,  men  with  money  are  willing  to  buy  stocks. 
There  is  practically  no  limit  to  the  amount  of  capital  a 
well-managed  corporation  can  get  together. 

Again,  corporate  organization  provides  for  centralized 
management.  The  stockholders  vote  for  the  Board  of 
Directors,  but  that  is  as  far  as  their  personal  influence 
extends.  There  is,  perhaps,  no  more  highly  centralized 
authority  than  is  found  in  the  administration  of  a  great 
business  organized  as  a  corporation.  This  is  necessary 
for  efficient  management. 

And  finally,  the  corporation  as  a  business  unit  enjoys 
a  continued  existence.  It  is  not  dependent  on  the  life 
of  any  particular  set  of  men.  In  this  respect,  it  is  like 
the  state.  This  fact  also  secures  for  the  corporation  a 
high  degree  of  confidence  from  those  who  have  money 
to  invest. 

The  growth  of  corporations  as  purely  business  units  is 
the  growth  of  the  last  seventy  or  eighty  years.  In  1830, 
there  were  very  few  corporations  in  the  United  States; 
at  the  present  time,  there  are  in  this  country  over  three 
hundred  and  fifty  thousand  corporations.  This  is  not 
strange  when  we  hold  in  mind  our  industrial   history. 


BUSINESS  INTEGRATION  23d 

Corporations  have  developed  with  the  extension  of  the 
market  and  the  growth  of  large  industries.  Without 
them,  the  marvelous  expansion  of  the  past  seventy-five 
years  would  not  have  been  possible. 

(c)  Trusts  and  Holding  Companies. — The  trend  of 
business  integration  has  gone  beyond  the  development  of 
the  corporation.  It  has  been  carried  to  the  extent  of 
what  may  be  roughly  described  as  partnerships  of  cor- 
porations. They  at  first  assumed  the  form  of  trusts; 
that  is  to  say,  the  stockholders  in  the  several  corporations 
which  it  was  desired  to  organize  into  a  partnership, 
placed  their  stock  in  the  hands  of  a  trustee  by  whom  the 
business  of  all  the  corporations  was  to  be  managed. 
By  this  means,  a  business  unit  composed  of  many  pre- 
viously independent  corporations  was  created.  This 
combination  was  called  a  trust,  because  the  stock  of  the 
once  independent  corporations  was  placed  "in  trust"  in 
the  hands  of  the  men  who  formed  the  central  association. 

It  was  claimed  that  trusts  of  this  sort  stifled  competi- 
tion. For  that  and  other  reasons,  they  are  held  to  be 
illegal  organizations,  and  trusts  as  such  came  to  an  end; 
but  the  holding  company  has  taken  the  place  of  the  trust. 
This  in  effect,  though  not  in  form,  is  a  partnership  of 
corporations.  It  at  least  secures  unity  of  action  on  the 
part  of  what  otherwise  would  be  independent  competing 
corporations.  A  holding  company  is  brought  about  by 
the  selection  of  one  corporation  out  of  a  group  of  cor- 
porations that  desire  to  realize  community  of  action,  to 
own  and  hold  the  securities  of  the  other  corporations. 
Or  it  may  be  that  a  new  corporation  is  organized  for  the 
sole  purpose  of  buying  up  the  stocks  and  bonds  of  a  group 
of  corporations.    This  would  bring  about  the  same  degree 


240  DESCRIPTION  OF  INDUSTRY 

of  control  over  the  actions  of  these  corporations  as  the 
trust  was  supposed  to  exercise.  Thus  far,  the  courts  have 
not  ventured  to  say  that  holding  companies  are  illegal 
because  of  the  form  of  their  organization.  We  may, 
therefore,  recognize  these  business  units  as  a  phase  of 
business  organization,  of  which  there  are  many  illustra- 
tions in  the  business  world  of  to-day. 

The  holding  company  is  used  in  two  ways.  It  may  be 
used  to  bring  under  a  centralized  conti"ol  the  affairs  of 
corporations  which  produce  the  same  kind  of  goods,  and 
offer  these  goods  for  sale  on  the  same  market;  or,  to  bring 
together  a  series  of  industries  which  are  closely  related 
in  the  production  of  a  given  product.  The  United  States 
Steel  Corporation  illustrates  both  of  the  above  named 
conditions,  but  it  is  here  referred  to  as  a  concrete  illus- 
tration of  the  organization  of  correlated  industries.  In 
this  case,  the  mines  of  iron  ore  in  Minnesota,  the  railways 
that  transport  the  ore  to  Lake  Superior,  the  fleet  that 
carries  the  ore  to  the  ports  on  Lake  Erie,  the  railways 
that  connect  the  lake  ports  with  the  mills  in  Pennsyl- 
vania, the  coke  oven  that  produces  the  coke,  the  coal 
mines  that  furnish  the  coal  from  which  the  coke  is  made, 
the  limestone  quarries  that  furnish  the  stone,  the  furnaces 
that  reduce  the  ore  and  make  the  steel,  the  rolling  mills 
that  take  one  step  in  the  manufacture  of  the  steel,  ship^ 
yards,  and  other  industries  that  are  consumers  of  steel,—- 
all  these  lines  of  industry  are  organized  as  a  single  business 
unit.  They  are  controlled  through  a  centralized  holding 
of  stocks  and  bonds.  The  United  States  Steel  Corpora- 
tion is  an  extreme  illustration  of  business  integration. 

Two  lessons  may  be  learned  from  the  foregoing  de- 
scription of  business  units.    It  shows,  in  the  first  place, 


BUSINESS  INTEGRATION  241 

how  far  the  business  world  has  departed  from  the  simple 
organization  of  the  latter  part  of  the  eighteenth  century. 
An  organization  adapted  to  the  use  of  tools,  small  in- 
dustries, and  local  markets  is  one  thing:  an  organization 
adapted  to  the  use  of  machinery,  large  industries,  and  a 
world's  market  is  quite  another. 

In  the  second  place,  the  development  of  corporations 
and  holding  companies  as  business  units  should  make 
clear  the  fact  that  principles  of  control  and  governmental 
poUcies,  which  might  have  worked  well  when  industries 
were  simple  and  simply  organized,  may  perhaps  be  in- 
effective for  the  realization  of  justice  now  that  corpora- 
tions and  holding  companies  give  character  to  industrial 
life.  It  is  assumed  by  the  theory  on  which  Anglo-Saxon 
business  law  rests,  that  there  will  continue  to  be  a  large 
number  of  independent  business  units,  rather  than  a 
small  number  of  gigantic  corporations,  doing  business. 
Does  the  existence  of  a  relatively  few  big  industries  prove 
that  the  theory  on  which  industrial  society  rests  is  a  false 
theory?  A  mere  description  of  the  modern  business  world 
raises  profound  questions. 

§  66.  Organization  for  Bargaining. — It  is  a  universal 
fact  of  history  that  men  who  are  conscious  of  the  same 
class  interests  will  organize  for  class  benefits.  The  in- 
dividual believes  himself  to  be  too  weak,  acting  inde- 
pendently, to  secure  what  he  regards  as  his  just  dues;  he 
therefore  joins  with  others  in  the  same  plight,  knowing 
that  in  union  there  is  strength.  This  attitude  of  mind 
results  in  many  sorts  of  class  organizations.  For  the 
most  part,  these  organizations  in  the  industrial  world 
have  to  do  with  sharing  the  product.  We  shall  consider 
them  uuder  two  heads,  namely:  labor  organizations  and 


242  DESCRIPTION  OF  INDUSTRY 

manufacturers'  associations.  It  is  not  our  purpose  to 
discuss  the  propriety  of  such  organizations,  or  to  consider 
how  far  they  may  be  efficient  in  attaining  the  ends  sought. 
Our  only  purpose  is  to  describe  them  as  phases  of  business 
integration. 

(a)  Labor  Organizations. — Since  the  introduction  of 
machinery  and  the  substitution  of  the  factory  system  for 
domestic  industry,  what  is  known  as  the  labor  class  and 
the  labor  interest  has  played  an  important  role  in  the 
adjustment  of  industrial  conditions.  A  laborer,  it  will 
be  remembered,  is  an  industrial  worker  who  lives  by  the 
hire  of  his  time  and  skill.  He  has  no  property  in  the 
capital  with  which  he  works  nor  in  the  goods  he  helps  to 
make.  His  wages  are  his  income,  and  he  is  interested  in 
having  the  highest  possible  rate  of  wages  set  up  in  the 
production  contract.  His  standing  in  the  industrial  world 
is  fixed  by  the  rate  of  pay  for  labor  therein  expressed. 
Where  there  is  no  very  marked  social  barrier  between 
the  laborer  and  his  employer,  so  that  the  two  meet  each 
other  on  a  common  footing,  and  where  a  little  capital  and 
a  few  assured  customers  are  all  that  are  needed  to  start  a 
new  business,  the  wage  bargain  between  master  and  man 
is  Ukely  to  be  fair  to  both  parties.  This  is  true  because 
each  can  compare  what  he  gets  with  what  the  other 
receives,  and  because  the  ease  of  passing  from  the  con- 
dition of  man  to  that  of  master,  and  from  that  of  master 
to  that  of  man,  keeps  wages  and  profits  about  on  the 
same  level.  Under  such  conditions,  personal  bargains 
result  in  a  reasonable  production  contract  from  both 
points  of  view. 

Since  the  introduction  of  great  industries,  however,  the 
conditions  for  wage  bargaining  described  above  are  im- 


BUSINESS  INTEGRATION  243 

possible  of  realization.  The  difficulty  of  passing  from 
the  labor  class  to  the  employer  class  has  greatly  increased. 
Indeed,  the  possibility  of  such  a  transfer  is  no  longer  a 
controlling  consideration  in  the  modem  business  world. 
Nor  is  the  wage  bargain  a  personal  bargain  of  industrial 
equals.  On  the  one  side,  are  a  thousand  men  who  seek 
employment;  on  the  other,  is  a  single  man  who  controls 
the  avenue  to  employment.  The  strength  of  the  employer 
in  this  case  is  that  he  has  full  knowledge  of  the  situation. 
He  can  hold  off  and  dicker  without  fear  of  loss.  He  is 
what,  in  the  language  of  the  street,  is  called  a  "strong 
holder"  for  the  purpose  of  making  a  bargain.  The  thou- 
sand men  unorganized,  on  the  other  hand,  are  weak 
holders.  They  are  ignorant  of  the  number  of  places  to 
be  filled,  as  also  of  the  prospects  of  the  business  that  seeks 
their  labor.  They  have  no  standard  by  which  to  judge 
what  they  may  reasonably  ask,  and  each  man  fears  that 
too  long  delay  in  accepting  the  terms  offered  will  mean 
that  his  neighbor  is  employed  and  that  he  is  left  without 
a  job. 

By  organization,  such  is  the  argument,  laborers  become 
strong  holders  for  the  purpose  of  making  a  bargain. 
Having  chosen  a  leader,  the  labor  interest  can  be  handled 
as  a  unit,  thus  bringing  it  up  to  the  same  level,  for  purpose 
of  bargaining,  as  the  employer  who  controls  the  oppor- 
tunity of  employment.  The  duty  of  this  leader,  also,  is 
to  study  the  industrial  situation  for  the  purpose  of  finding 
out  what  it  is  reasonable  for  laborers  to  demand.  And 
finally,  organization  diffuses  information  to  all  members 
of  a  labor  union  of  what  other  members  of  the  union  are 
willing  to  stand  for,  and  thus  eliminate  the  danger  of  a 
panic  and  a  scramble  for  places.    Whether  this  argument 


244  DESCRIPTION  OF  INDUSTRY 

be  sound  or  not,  it  has  convinced  large  numbers  of  work- 
ingmen,  and  has  led  to  extensive  organization  among  them. 

These  organizations  take  upon  themselves  many  forms. 
Their  constitution  and  by-laws  show  a  wide  range  of  aims. 
Their  practices  are  at  times  open  to  censure.  The  rights 
which  they  claim  under  the  law  are  not  as  yet  fully  recog- 
nized. To  take  up  these  topics  would  be  to  enter  upon  a 
study  of  those  vexed  questions  that  pertain  to  the  labor 
problem.  Our  immediate  task  is  accomplished  if  we 
recognize  labor  organizations  of  all  sorts  as  voluntary 
associations  which  have  sprung  up  in  response  to  what  is 
beUeved  to  be  a  class  interest,  and  through  whose  agency 
the  wage  element  in  the  production  contract  is  largely 
determined.  Trade  unions  are  a  phase  of  business  organ- 
ization: they  are  an  illustration  of  the  trend  towards 
the  integration  of  common  interests  in  the  modern  busi- 
ness world. 

(b)  Employers'  Associations. — Employers  as  well  as 
laborers  have  thought  it  well  to  organize,  and  one  purpose 
of  their  organization  is  to  establish  themselves  as  strong 
holders  when  called  upon  to  frame  production  contracts. 
From  one  point  of  view,  organization  on  the  part  of  em- 
ployers is  an  offset  to  organization  on  the  part  of  laborers. 
Looked  at  historically,  this  is  the  third  step  in  organiza- 
tion, for  the  purpose  of  making  wage  bargains,  since  the 
advent  of  great  industries.  The  factory  system  itself 
brought  that  concentration  of  capital  which,  in  the  first 
instance,  broke  the  conditions  that  made  the  laborer  and 
his  employer  fairly  equal  for  the  purpose  of  striking  a  bar- 
gain. To  even  up,  the  laborers  organized  trade  unions 
in  which  membership  is  confined  to  workers  in  particular 
trades.    These  equaUzed  the  bargaining  strength  of  the 


BUSINESS  INTEGRATION  245 

two  parties  so  far  as  large  industries  are  concerned.  Who 
took  the  next  step  is  not  clear,  but  for  the  purpose  of 
definite  presentation  it  will  be  assumed  that  it  was  taken 
by  the  laborers,  when  they  organized  the  independent 
trade  unions  into  a  kind  of  clearing  house  of  labor 
interests.  In  this  country,  this  centralized  organization 
is  known  as  the  Federation  of  Labor.  By  this  step,  the 
employers  felt  themselves  to  be  weakened  for  the  purpose 
of  striking  a  wage  bargain,  and,  as  a  fourth  and  final  step 
in  the  order  of  change,  agreed  to  act  together  to  regain 
their  lost  influence.  This  is  the  explanation  of  employers' 
associations,  and  in  this  explanation  we  find  a  graphic  por- 
trayal of  the  conditions  under  which  production  is  now 
carried  on. 

Manufacturers  Associations  are  associations  which  have 
for  one  of  their  aims  the  control  of  labor  conditions  for 
their  members.  The  production  of  coal  is  carried  on  by 
standard  scales  of  wages  which  are  agreed  upon  by  trade 
union  leaders  on  the  part  of  the  miners,  and  Commis- 
sioners who  represent  the  mine  owners.  A  controversy 
over  the  wages  of  railway  employees,  provided  the  em- 
ployees are  organized,  is  handled  for  the  Companies  by  a 
committee  appointed  by  the  American  Railway  Associa- 
tion, which  is  a  national  organization  composed  of  railroad 
Presidents  and  General  Managers.  These  are  but  il- 
lustrations of  the  high  degree  of  centralized  control,  so  far 
as  wage  bargains  are  concerned,  which  has  been  attained 
by  the  modern  business  world. 

A  conclusion  of  some  importance  may  be  drawn  from 
the  foregoing  description.  The  fact  that  a  considerable 
portion  of  laborers  and  employers  are,  either  directly 
or  indirectly,  parties  to  all  sorts  and  kinds  of  production 


246  DESCRIPTION  OF  INDUSTRY 

contracts,  is  something  of  a  guarantee  that  the  rate  of 
wages  agreed  upon  will  prove  to  be  a  fairly  stable  stand- 
ard wage.  This  means  that  all  of  these  organizations  are 
useful  factors  in  the  framing  of  production  contracts  by 
which  the  basal  wage,  the  average  interest,  and  the  normal 
profit  are  determined.  As  long  as  the  wage  system,  and 
all  that  it  implies,  lasts,  this  highly  centralized  organization 
of  class  interests  must  continue,  for  without  its  restraining 
influence,  competition  is  likely  to  prove  unduly  tyrannical. 
The  lesson  of  this  chapter  seems  to  be  clear  as  far  as  it 
goes.  The  general  theory  on  which  industrial  society 
rests  is  that  of  the  free  play  of  personal  interests.  Among 
the  personal  rights  recognized  is  the  right  of  contract  and 
of  voluntary  association.  A  study  of  the  existing  situa- 
tion shows  that  this  right  has  been  used  in  such  a  way  as 
to  bring  about  the  partial  substitution  of  group  action 
and  group  responsibility  for  individual  action  and  per- 
sonal responsibility.  This  has  undoubtedly  led  to  ef- 
ficiency in  production  and  stability  of  business  pro- 
cedure. At  the  same  time,  it  must  be  conceded  that,  when 
men  use  the  right  of  voluntary  association  for  class  bene- 
fits, they  do  so  at  the  expense  of  personal  freedom.  This 
phase  of  business  integration  may  mean  the  disintegration 
of  established  relations.  Undirected  and  uncontrolled 
by  the  social  will,  this  tendency  threatens  to  overturn 
the  business  world  as  at  present  organized.  This  is  a  seri- 
ous situation.  A  definite  choice  is  forced  upon  us.  It  may 
be  that  the  time  has  come  when  the  state  must  assume  the 
task,  consciously,  openly,  and  without  apology,  of  keeping 
open  the  door  of  opportunity  for  individual  enterprise.  At 
least,  the  situation  thus  disclosed  makes  clear  the  existence 
of  a  very  definite  and  very  pressing  industrial  problem. 


CHAPTER  XrV 

GOVERNMENT  AND  INDUSTRY 

"The  State,  therefore,  claims  and  exercises  a  controlling  and  reg- 
ulating authority  over  every  sphere  of  social  life,  including  the 
economic,  in  order  to  bring  individual  action  into  harmony  with  the 
good  of  the  whole." — Inghram. 

There  are  two  theories  respecting  the  place  govern- 
ment should  occupy  in  the  business  world.  According  to 
the  one,  government  should  assume  complete  control  over 
all  co-operative  activities;  according  to  the  other,  govern- 
ment and  industry  should  be  kept  entirely  apart.  The 
former  relies  on  the  political  principle  of  control;  the  latter 
on  the  free  play  of  commercial  forces.  The  former  is 
called  industrial  socialism:  the  latter  may  be  called  indus- 
trial  jndividuahsm. 

As  a  matter  of  fact,  neither  of  these  two  theories  has 
ever  been  adopted  to  the  exclusion  of  the  other.  Every 
society  of  which  we  know  has  made  use  of  both  principles 
of  control,  and  this  will  be  true  to  the  end  of  time.  The 
philosophy  that  lies  back  of  the  relation  of  government  to 
industry  we  leave  for  others  to  discuss;  our  task  is  confined 
to  a  description  of  the  kinds  of  laws  touching  industry 
which  modern  governments  think  it  wise  to  enact  in  order 
to  secure  the  highest  welfare  of  citizens.  These  laws  are 
of  four  fairly  well-defined  classes  as  follows: 
/  Factory  legislation, 
J  Enforcement  of  competition, 

Exclusion  of  competition,  and 
j  Supervision  of  competition. 
247 


248  DESCRIPTION  OF  INDUSTRY 

One  who  understands  these  phrases,  and  appreciates  the 
legislative  policies  for  which  each  phrase  stands,  has  a 
fairly  satisfactory  grasp  of  the  kind  of  problems  that  pre- 
sent themselves  to  those  who  frame  and  administer  our 
industrial  laws. 

§  57.  Factory  Legislation. — ^A  factory  law  may  be 
defined  as  any  law  which  aims  to  lay  down  the  conditions 
under  which  industry  may  be  carried  on;  but  which,  in 
its  administration,  does  not  interfere  with  the  industrial 
control  exercised  by  competition.  The  law  passed  by 
Congress  which  limits  continuous  service  on  the  part 
of  train  crews  to  sixteen  hours  a  day,  is  a  factory  law. 
It  prescribes  a  condition  for  the  employment  of  one  class 
of  railway  employees.  The  laws  that  control  work  in  the 
coal  mines  of  Illinois,  are  factory  laws.  Sunday  closing 
laws  for  barbers,  laws  that  prescribe  the  conditions  under 
which  women  may  be  employed,  child  labor  laws,  laws 
which  aim  to  secure  safety  and  health  in  factories, — 
these  are  all  factory  laws  because  they  prescribe  the  con- 
ditions under  which  work  can  be  carried  on. 

It  seems  then  that  the  phrase  "factory  legislation" 
covers  a  large  range  of  enactments.  The  name  arose  be- 
cause_the  first  laws  of  this  class  were  passed  to  cure  cer- 
tain evils  that  arose  in  the  cotton  and  woolen  factories  in 
England.  Children  were  employed  to  run  machines  and 
were  forced  to  work  twelve  or  more  hours  a  day.  They 
ate  in  the  factories,  herded  in  dormitories  for  sleep,  and 
no  provision  was  made  for  their  recreation  or  their  educa- 
tion. The  fathers  and  mothers  were  more  interested  in 
the  wages  earned  by  their  children,  than  in  the  welfare 
of  the  children.  As  a  result  of  this  kind  of  treatment, 
it  was  soon  observed  that  the  children  were  growing  into 


GOVERNMENT  AND  INDUSTRY  249 

an  ignorant,  stunted,  and  vicious  manhood  and  woman- 
hood. Of  course,  the  state,  which  from  its  nature  holds 
in  mind  the  welfare  of  the  community  as  a  whole,  stepped 
in  and  laid  down  by  law  the  conditions  on  which  children 
could  be  employed  in  factories;  and,  in  so  doing,  opened  up 
a  line  of  legislative  enactment  which  has  gone  into  almost 
every  branch  of  industry.  It  has  come  to  be  a  recognized 
function  of  government  to  prescribe  the  conditions  under 
which  the  free  play  of  commercial  forces  will  be  allowed. 

It  seems,  at  first  blush,  that  factory  legislation  is  not 
in  harmony  with  the  principle  of  competition  on  which, 
as  explained  in  Chapter  III,  our  industrial  order  rests; 
and  it  is  true  that  the  first  factory  laws  were  strongly 
opposed  on  that  ground.  At  present  this  opposition  has 
passed  away,  but  it  will  assist  us  to  understand  the  kind 
of  business  world  in  which  we  now  live,  if  the  arguments 
urged  in  defense  of  this  class  of  legislation  are  passed  in 
review. 

In  the  first  place,  it  was  made  clear  that  the  principle 
of  free  competition  is  not  to  be  regarded  as  a  natural  law, 
or  as  a  scientific  principle  which  is  superior  to  the  control 
of  reason.  It  is  merely  an  expression  of  common  ex- 
perience that,  for  the  most  part,  men  work  best  when 
they  are  left  to  work  in  their  own  way,  and  that  a  con- 
dition of  freedom  tends  to  develop  industrial  efiiciency  as 
well  as  personal  character.  If,  however,  it  is  observed 
that  the  competition  which  actually  takes  place  between 
employers,  in  their  struggle  for  cheapness,  is  such  as  to 
bring  about  well-defined  and  widespread  evils,  the  state 
must  step  in  and  regulate  competition.  /  The  presumption 
is  in  favor  of  freedom,  but  presumption  must  give  way  if 
the  facts  are  against  it.)  This  is  one  line  of  argument  in 


250  DESCRIPTION  OF  INDUSTRY 

support  of  factory  legislation.  Every  proposed  law  is 
considered  on  its  merits. 

The  second  argument  in  support  of  factory  legislation 
recognizes  that  competition  in  itself  is  a  blind  jprce. 
While  it  makes  for  efficiency  introduction,  it  has  no  re- 
gard for  moral  standards.  Unrestricted  by  law,  its 
tendency  may  BeTo  depress  industrial  conditions.  In  the 
case  of  child  labor,  for  example,  it  might  be  that  only  one 
of  ten  competing  manufacturers  would  care  to  increase 
his  profits  by  the  employment  of  children.  If  one  man- 
ufacturer chose  to  do  this,  however,  the  other  nine  must 
follow.  At  this  point,  the  law  steps  in  and  says  that  the 
manufacturer  who  disregards  the  rights  of  childhood 
should  be  required  to  carry  on  his  business  in  a  manner 
which  approves  itself  to  the  other  nine.  To  use  a  tech- 
nical phrase,  a  child  labor  law  of  this  sort  determines  the 
plane  of  competition  for  all  competitors.  The  productive 
principle  of  industrial  freedom  is  in  no  sense  impaired  by 
such  a  law,  but  society  is  guarded  against  the  evil  results 
of  the  unregulated  competition. 

Such  is  the  formal  or  logical  defense  of  factory  legis- 
lation. All  competition  must  conform  to  some  general 
standard.  The  important  question  is,  whether  the  best 
men  or  the  worst  men  in  the  community  shall  set  that 
standard.  Under  unregulated  competition,  the  worst 
methods,  from  the  social  point  of  view,  will  prevail  pro- 
vided they  lead  to  cheap  production;  under  wise  legis- 
lative enactments,  the  higher  moral  standards  of  the 
community  may  be  reaUzed  in  business.  It  is  the  task 
of  government  to  determine  the  plane  of  competition. 

It  seems  then,  that  factory  legislation  can  be  defended 
on  both  practical  and  theoretical  grounds.     Of  more 


GOVERNMENT  AND  INDUSTRY  251 

importance  to  us,  however,  is  the  fact  that  through  fac- 
tory legislation  the  government  finds  a  definite  and  a 
permanent  place  in  industry.  It  builds  the  framework 
of  the  business  world,  and  should  build  it  in  such  a  way 
as  to  get  the  best,  rather  than  the  worst,  out  of  the  force 
of  competition.  It  is  a  proper  function  of  government 
to  protect  citizens  from  the  evils  of  unregulated  competi- 
tion. 

§  68.  Enforcement  of  Competition. — The  lesson  has 
already  been  learned  that  just  prices,  just  contracts  and 
in  general  just  results  in  business  affairs,  are  the  normal 
outcome  of  an  open  market.  Especially  will  this  be  true 
if  government  enacts  wise  laws  for  the  control  of  markets. 
Freedom  in  the  production,  the  sale,  and  the  purchase 
of  goods,  under  such  conditions  as  an  effective  govern- 
ment may  see  fit  to  impose,  tends  to  establish  and  main- 
tain a  reasonable  and  an  equitable  scale  of  prices. 

It  is  not,  however,  at  all  times  easy  to  maintain  an 
open  market.  In  some  kinds  of  business,  and  under  some 
conditions,  it  is  possible  for  individuals  to  block  the  flow 
of  goods,  and  by  so  doing  to  force  competition  to  work 
for  their  personal  benefit.  /Those  who  are  competitors 
may  agree  not  to  compete,  and  by  this  means  create  a 
monopoly  in  the  business  concerned.)  There  are  many 
ways  in  which  the  right  of  free  contract  can  be  used  to 
destroy  a  condition  of  free  industry.  The  result  is  that 
prices  which  ought  to  conform  to  the  cost  of  production 
and  thus  yield  a  normal  profit,  come  to  be  monopoly  prices 
and  to  yield  a  speculative  or  a  monopoly  profit. 

Such  a  situation  is  contrary  to  the  idea  of  industrial 
freedom  which  the  modem  business  world  aims  to  realize. 
The  only  way  that  buyers  have  to  circumvent  the  monop- 


252  DESCRIPTION  OF  INDUSTRY 

olist  is  to  refuse  to  buy  the  goods  which  the  monopolist 
offers  for  sale.  That  is  to  say,  the  public  can,  by  boy- 
cotting the  goods  produced  under  conditions  of  monopoly, 
force  the  monopoly  out  of  business.  At  present,  however, 
this  means  of  controlling  prices  in  the  interest  of  con- 
sumers is  not  very  extensively  employed.  Rightly  or 
wrongly,  that  we  need  not  discuss,  it  is  the  incUnation  of 
Western  peoples  to  assume  that  the  government  will  pro- 
tect its  citizens  from  the  evils  of  monopolies  of  all  sorts. 

To  a  slight  extent  the  government  has  recognized  this 
responsibility.  Our  courts,  for  example,  are  usually  ready 
to  annul  a  contract  that  is  "in  restraint  of  trad.e.''  Our 
legislators,  also,  have  passed  "anti-trust  laws,",  the  object 
of  which  is  to  destroy  any  business  organization  that  has 
for  its  purpose  the  control  of  competition  to  the  detriment 
of  the  public.  Such  a  purpose  on  the  part  of  government 
is  sound.  These  monopolies  ought  to  be  destroyed. 
Competition  ought  to  be  restored  as  the  regulator  of 
busuiess. 

We  cannot  press  further  our  consideration  of  this, 
the  most  difficult  public  question  of  modem  times.  Our 
description  of  the  modern  business  world  demands  the 
frank  recognition  of  the  wide  prevalence  of  industrial 
monopolies.  How  the  problem  will  be  solved,  we  cannot 
say.  Nothing  very  definite  or  effective  has  yet  been 
done,  either  by  voluntary  movements  on  the  part  of 
buyers,  or  by  government.  The  situation  still  awaits  a 
wise  statesman.  Our  lesson,  however,  is  learned  when  we 
come  to  see  that  the  growth  of  monopolies  under  free- 
dom of  contracts,  opens  up  to  government  a  line  of  con- 
duct which  otherwise  government  might  wisely  avoid. 
Here,  as  everywhere  among  English  speaking  peoples, 


GOVERNMENT  AND  INDUSTRY  253 

fact  and  not  theory  controls  the  relation  of  government 
to  industry. 

§  59.  Exclusion  of  Competition.^The  above  paragraph 
refers  to  private  monopolies.  Public  monopolies  are  not 
open  to  the  same  criticism,  Yor  the  reason  that  public 
industries  are  not  administered  under  the  influence  of 
the  desire  to  reap  the  highest  possible  profit.  If  the 
government  own  and  operate  an  industry,  the  profit,  if 
profit  accrues,  goes  to  the  public  treasury,  and  all  ques- 
tions of  organization  and  management  are  decided  from 
the  point  of  view  of  the  public  service.  Such  reasoning 
has  led  many  to  urge  that  the  government  should  own 
and  operate  all  industries,  and  that  all  citizens  should  be 
in  the  employ  of  the  state  in  one  capacity  or  another. 
They  who  urge  this  program  profess  to  believe  that 
competition  always  works  badly;  that  it  cannot  be  con- 
trolled; and  that  the  only  thing  to  do  is  to  exclude  it 
from  the  business  world  altogether. 

While  one  cannot  say  that  the  program  of  the  govern- 
ment ownership  of  all  industries  has  many  adherents, 
it  is  true  that,  in  certain  lines,  the  tendency  towards 
government  ownership  is  quite  strong.  The  industries 
to  which  this  tendency  pertains  are  known  as  public 
service  industries.  The  common  experience  of  cities 
with  privately  owned  water  works,  illustrates  quite  well 
the  change  in  public  opinion  with  regard  to  public  service 
industries.  At  one  time  it  was  supposed  that  water  rates 
and  water  service  could  be  controlled  by  competition, 
provided  a  city  could  bargain  with  two  or  three  companies 
for  price  and  for  service.  It  is  now  universally  conceded 
that  such  a  policy  fails  to  work;  that,  sooner  or  later,  the 
competing  water  companies  will  combine  and  by  this 


254  DESCRIPTION  OF  INDUSTRY 

means  throttle  competition.  Then  the  price  for  water 
goes  up  and  the  grade  of  the  service  goes  down. 

The  same  is  true  of  telephone  companies,  gas  com- 
panies, and  companies  organized  for  the  production  and 
the  sale  of  electric  light  and  power.  Street  railways 
and  public  wharves  fall  within  the  same  class;  and  per- 
haps steam  railways  should  also  be  added. 

Here,  then,  is  a  class  of  industries  that  stands  by  itself. 
Experience  shows  that  the  principle  of  competition  can- 
not force  from  these  industries  their  best  service  at  reason- 
able rates,  and,  as  a  consequence,  appeal  is  made  to  the 
political  principle.  One  way  of  applying  this  principle 
is  through  government  ownership  and  management. 
This  is  what  the  caption  which  stands  at  the  beginning 
of  this  paragraph  means,  i  A  government  owned  and 
operated  industry  is  a  case  of  the  "exclusion  of  competi- 
tion." }  Competition  is  dethroned  as  a  principle  of  con- 
trol, and  reliance  is  placed  for  fair  and  efficient  manage- 
ment on  rules  of  political  science.  Government  owned 
and  government  operated  industries  are  an  integral  part 
of  the  state,  just  as  the  army,  the  courts,  or  the  post- 
ofl5ce  are  parts  of  the  state. 

Two  lessons  may  be  learned  from  the  foregoing. 

First.  The  business  world  is  not  confined  to  business 
units  organized  for  the  production  of  a  profit.  An  electric 
lighting  plant  owned  and  operated  by  a  city  is  as  truly  a 
business  unit  as  a  cotton  factory  organized  as  a  private 
corporation,  owned  by  the  stockholders,  and  operated  by 
a  Board  of  Directors.  Industrial  society,  as  it  stands  to- 
day, recognized  both  public  and  private  industries. 

Second.  At  present,  public  industries  are  confined  to 
industries  which,  from  their  nature,  or  because  of  the 


GOVERNMENT  AND  INDUSTRY  ^5 

conditions  under  which  they  exist,  are  superior  to  the 
normal  control  of  the  free  play  of  commercial  forces. 
The  decision  on  the  part  of  municipalities  to  take  on 
industries,  such,  for  example,  as  the  supply  of  water, 
light,  or  transportation,  was  a  decision  that  sprang  out 
of  the  necessities  of  the  case.  Certain  persistent  evils 
were  observed  to  result  from  private  management,  and 
on  that  account  citizens  voted  for  public  management. 
It  is  worth  while  to  recognize  this  fact,  for  it  goes  far  to 
make  clear  the  kind  of  world  in  which  we  live,  and  the 
way  it  came  to  be  what  it  is.  Its  condition  at  any  par- 
ticular time,  or  its  development  from  time  to  time,  is  the 
result  of  a  multitude  of  practical  decisions  on  practical 
questions.  So  far  as  these  decisions  prove  to  be  wise, 
they  persist  and  the  organizations  to  which  they  lead  be- 
come a  permanent  part  of  the  industrial  structure;  if,  on 
the  other  hand,  they  prove  to  be  futile,  they  are  set  aside 
and  some  other  plan  is  worked  out.  One  who  grasps  firmly 
the  process  by  which  the  business  world  has  come  to  be 
what  it  is,  will  never  be  influenced  by  some  frenzied  orator 
who,  because  he  can  point  out  things  that  are  not  quite 
right,  wants  to  destroy  everything  that  is,  and  recon- 
struct the  world  on  some  plan  of  his  own  making. 

§  60.  Supervision  of  Competition. — There  is  another 
plan  by  which  the  evils  of  competition  can  be  overcome, 
a  plan  which  finds  many  illustrations  in  our  modern  busi- 
ness world.  The  ownership  and  the  management  of  in- 
dustries not  subject  to  the  normal  control  of  competition, 
may  continue  in  private  hands,  but  the  government  will 
undertake  to  exercise  administrative  supervision  over  that 
management.  In  the  case  of  factory  legislation,  the  law- 
making body  lays  down  the  conditions  under  which  pri- 


256  DESCRIPTION  OF  INDUSTRY 

vate  business  can  be  carried  on.  This  is  all  right  when 
those  conditions  are  relatively  simple  and  can  be  expressed 
in  exact  language.  It  is  not  always  possible,  however,  for 
the  law  makers  to  do  this  in  a  successful  way  for  all  lines 
of  industry.  The  details  of  a  business  may  be  so  intricate 
that  no  general  law  can  be  framed  that  will  not  do  more 
harm  than  good.  In  such  cases,  the  law-making  body  must 
content  itself  with  laying  down  certain  general  principles, 
and  then  hand  over  to  a  Commission,_or  a  Board,  the 
task  of  applying  the  principles  to  particular  situations 
as  they  arise. 

The  Railroad  Conimissions  of  the  states  or  of  the  Federal 
government  are  illustrations  of  administrative  jurisdic- 
tion. They  were  created  to  exercise  supervisory  control 
over  railway  industries,  but  the  plan  may  be  appHed  to 
other  lines  of  industry  as  well.  The  laws  creating  Com- 
missions first  recite  certain  specific  acts  that  are  unlawful. 
For  example,  discrimination  between  the  patrons  of  rail- 
ways, or  between  the  places  which  railways  serve,  is  de- 
clared to  be  unlawful.  A  railway  that  charges  Mr.  A  $10 
for  a  service  and  requires  Mr.  B  to  pay  $15  for  the  same 
service,  commits  an  act  contrary  to  the  law  and  may  be 
punished  accordingly.  The  evil  of  discrimination  lies  in 
the  fact  that  the  shippers  who  pay  the  top  price  for  freight 
do  not  have  a  fair  chance,  when  brought  into  competition 
with  other  shippers.  This  law  of  Congress  which  forbids 
discrimination  on  the  part  of  railways  is  justified,  because 
it  keeps  open  the  door  of  opportunity  for  the  rank  and  file 
of  industries. 

This  law  also  says  that  all^ates  must  be  reasonable, 
and  that  unreasonable  rates  are  unlawful.  It  is  the  task  of 
the  Commission  to  say  what  rates  are  and  what  are  liot 


GOVERNMENT  AND  INDUSTRY  257 

reasonable.  Here  is  a  case  in  which  the  government  fixes 
a  price  and  does  so  in  order  to  protect  consumers  against 
monopoly  and  speculative  prices.  The  purpose  of  this 
law  is  to  restrain  or  control  competition. 

The  administration  of  these  laws  is  placed  in  the  hands 
of  Commissioners  appointed  for  that  special  purpose, 
but  the  method  of  administration  is  of  no  importance  to 
us  at  this  time.  Our  interest  in  this  matter  is  con- 
fined to  the  Hght  which  it  throws  on  the  place  oc- 
cupied by  government  in  the  modern  business  world. 
Whether,  in  case  of  pubhc  service  industries,  the  gov- 
ernment chooses  to  own  and  operate  them,  or  to  exer- 
cise administrative  supervision  over  them,  the  general 
point  of  view  is  the  same.  Competition  cannot  control 
these  industries  in  a  satisfactory  way,  and  for  that  reason 
appeal  is  made  for  public  control.  Those  who  put  their 
faith  in  a  society  built  up  in  this  haphazard  way,  do  so  be- 
cause they  believe  that  better  results  will  follow  a  policy 
that  corrects  specific  evils  when  they  appear,  than  a  policy 
which  aims  to  organize  everything  with  scientific  precision 
at  the  outset. 

§  61.  Other  Avenues  of  Influence. — There  are  many 
other  ways  in  which  government  comes  into  touch  with 
industry,  besides  those  named  above.  The  certainty  of 
protection  in  the  enjoyment  of  such  rights  as  the  law 
allows  is  essential  for  the  stimulation  of  industrial  enter- 
prise. Life,  property,  and  the  enforcement  of  contracts, 
must  be  assured  or  there  will  be  no  industry.  A  state  of 
anarchy  or  of  uncertainty  is  deadly  for  the  business  man. 
No  high-grade  business  enterprise  ever  developed  except 
under  the  protection  of  a  strong  and  just  government.  His- 
tory affords  many  illustrations  of  the  truth  of  this  statement. 


258  DESCRIPTION  OF  INDUSTRY 

In  addition  to  the  function  of  protection,  and  those 
activities  of  the  state  described  in  the  foregoing  paragraphs 
which  have  for  their  purpose  the  eUmination  of  evils 
traceable  to  competition,  (the  machinery  of  government  is 
called  into  use  for  the  attamment  of  three  general  ends^ 

(a)  Services  (hat  must  he  Umversal. — In  case  the  service 
to  be  rendered  must  belmivereal  in  order  to  be  efifective, 
government  is  obliged  to  step  in  and  assume  full  responsi- 
bility. The  PostofficeDepartment  affords  a  good  illus- 
tration. In  the  matter  of  carrying  the  mails,  it  is  not  pos- 
sible to  confine  this  service  to  those  locaUties  in  which  the 
service  makes  a  profit.  It  may  be  as  important  that  a  citi- 
zen of  Ohio  should  send  a  letter  to  a  correspondent  in 
Montana  as  in  the  next  county.  But  this  would  not  be 
possible  if  those  letters  only  were  carried  that  give  a  profit, 
as  would  be  the  case  if  the  mail  business  were  handed 
over  to  a  private  corporation.  The  Postoffice  principle 
is,  that  every  citizen  in  the  country  should  have  the  use 
of  mails  on  equal  terms,  and  that  the  profit  made  in  those 
parts  of  the  country  where  traffic  is  dense  should  be  used 
to  make  good  the  loss  where  traffic  is  sparse.  This  prin- 
ciple is  of  fairly  wide  application,  and  explains  many 
things  which  governments  do  as  well  as  the  manner  in 
which  they  are  done.  Services  of  this  sort  are  comple- 
mentary to  services  rendered  by  private  enterprise.  Both 
are  a  part  of  the  business  world  as  it  is  now  organized. 

(b)  ^vi<:p.s  tha(.  rrf.y.<if.  hp.  Sf/i,ri^nTdizfid^ — ^Another  line  of 
services  which  the  government  may  properly  undertake 
are  those  in  which  the  ruling  principle  is  found  in  the 
need  of  maintaining  standardized  conditions.  Public 
education  is  a  case  in  hand.  Education  might  be  made  a 
purely  commercial  matter;  and  this  would  doubtless  be 


GOVERNMENT  AND  INDUSTRY  259 

the  case  if  the  chief  end  of  education  is  to  benefit  the  one 
educated.  This  is  not,  however,  the  view  commonly 
entertained.  The  benefit  to  the  individual  is  incidental; 
the  ultimate  object  of  education  is  to  create  and  maintain 
an  intelligent  and  efficient  nation.  Neither  the  industrial 
program  accepted  by  modern  peoples,  nor  the  political 
constitution  under  which  men  five,  can  be  worked  by 
an  ignorant  population. 

Another  illustration  is  found  in  the  public  health  serv- 
ice. The  object  of  this  service  is  not  to  cure  the  sick — 
that  is  left  to  the  doctors  who  are  paid  by  the  persons  whom 
they  benefit.  The  object  is  rather  to  maintain  a  condition 
of  health  for  the  community  as  a  whole.  The  water 
and  the  air  must  be  pure;  the  streets  must  be  clean;  the 
garbage  and  filth  must  be  cared  for;  the  spread  of  con- 
tagious diseases  must  be  prevented.  These  are  the  re- 
sponsibilities assumed  by  government  with  regard  to 
public  health.  This  service  could  not  be  rendered  by 
private  enterprise.  Not  only  is  there  no  product  that 
can  be  offered  for  sale,  but  the  people  who  are  the  least 
able  to  pay  for  the  service  are  those  who  in  many  cases 
are  the  occasion  of  the  expense.  From  its  nature,  the 
public  health  service  must  be  assumed  by  the  government 
and  carried  on  in  much  the  same  way  that  the  police  de- 
partment is  carried  on.  Private  enterprise  could  not 
do  this.  The  health  department  is  typical  of  quite  a 
class  of  similar  services  rendered  by  government. 

(c)  Industrial  Significance  of  Taxes. — This  enumeration 
cannot  be  concluded  without  mention  of  the  exercise  by 
government  of  the  power  to  tax.  Taxation  is  not,  of 
course,  an  industry.  The  government  produces  nothing, 
nor  does  it  render  a  service,  when  it  levies  and  collects  a 


260  DESCRIPTION  OF  INDUSTRY 

tax.  On  the  contrary,  the  object  of  taxation  is  to  secure 
funds  for  the  support  of  those  services  which  government 
renders  gratuitously,  or  for  a  fee  not  at  all  commensurate 
with  the  cost  of  the  service.  Taxation  as  such  has  no  in- 
dustrial results.  It  has  in  itself  no  bearing  on  the  relation 
of  government  to  industry.  All  that  might  be  said  along 
this  line  has  already  been  said  in  pointing  out  the  non- 
commercial services  which  government  renders  to  its 
citizens. 

Nevertheless  taxation  does  at  any  particular  time  exert 
an  important  influence  on  the  character  of  the  business 
world  and  the  success  of  business  undertakings.  Tech- 
nically defined,  taxes  are  contributions  for  the  support  of 
the  state.  They  are  levied  by  law  and  collected  by  au- 
thority. Taxes  may  be  levied  in  many  ways,  but  all  with- 
out exception,  either  directly  or  indirectly,  come  out  of 
the  private  income  of  citizens,  or  are  paid  by  the  business 
before  those  who  own  the  business  get  a  profit.  For  our 
purpose,  therefore,  we  may  say  that  the  state  is  supported 
by  contributions  paid  out  of  private  incomes. 
(The  industrial  significance  of  taxation  does  not  depend 
as  much  upon  the  amount  of  money  which  the  govern- 
ment demands,  as  upon  the  methods  followed  in  the  levy 
and  collection  of  that  amount. )  Provided  the  government 
confines  its  services  to  those  tilings  that  government  can 
do  the  best,  and  provided  taxes  levied  for  the  support  of 
such  services  are  properly  levied,  the  business  world  may  be 
prosperous  and  successful  notwithstanding  the  fact  that 
taxes  are  high.  It  is  bad  taxation,  and  not  taxation  as 
such,  of  which  complaint  may  be  justly  made. 

This  explains  why  those  who  frame  tax  laws  endeavor  to 
distribute  the  amount  to  be  paid  in  proportion  to  the 


GOVERNMENT  AND  INDUSTRY  261 

abUity  of  citizens  to  pay.  Not  only  is  this  equitable  in 
itself,  but  it  distributes  the  burden  of  taxation  in  such  a 
way  that  it  is  most  easily  borne.  The  situation  is  some- 
thing like  that  of  the  soldier  and  his  knapsack.  Much 
attention  has  been  given  to  the  proper  loading  of  the  kit, 
and  the  proper  adjustment  of  the  straps,  in  order  that 
the  load  may  be  borne  with  the  greatest  ease.  In  much  the 
same  way  a  distribution  of  taxes  in  proportion  to  the  ability 
of  citizens  to  pay  is  an  effective  adjustment  of  the  tax  bur- 
den. By  this  means  the  load  is  made  to  appear  lighter.  The 
moral  effect  also  is  good.  Everyone  feels  that  he  is  doing  his 
fair  share  of  a  common  duty,  and  that  an  incompetent  gov- 
ernment is  not  imposing  on  him  more  than  his  fair  share. 

This,  then,  is  the  lesson.  Taxes,  in  and  of  themselves, 
exert  little  or  no  influence  on  the  business  world,  but  a  bad 
system  of  taxation  or  a  good  system  badly  administered, 
spreads  its  baneful  influence  throughout  the  entire  in- 
dustrial field.  The  evils  which  result  from  bad  taxation 
can  only  be  set  aside  by  reform  in  the  taxing  system. 

There  is  one  exception  to  the  above  statement.  The 
machinery  of  taxation  has  been  used,  and  there  are  many 
who  advocate  its  use,  to  attain  other  results  than  that  of 
collecting  the  amount  of  money  needed  to  meet  public 
expenditures.  To  this  extent  taxation  has  a  direct  in- 
fluence in  modifying  the  conditions  that  exist  in  the  busi- 
ness world.    An  illustration  will  make  this  clear. 

RenJ,  as  an  income  that  goes  to  those  who  own  land,  is 
not  affected  by  changes  in  the  cost  of  producing  goods.  It 
is  the  difference  between  the  highest  cost  and  the  lowest 
cost  of  producing  goods,  all  of  which  will  be  bought  when 
brought  to  the  market  for  sale.  An  increase  in  rental 
income  accrues  to  those  who  own  land  without  their  doing 


262  DESCRIPTION  OF  INDUSTRY 

anything  to  deserve  the  increase.  This  is  thought  by 
some  to  be  unfair,  and  they  propose  to  take  away  this 
rental  income  by  a  special  tax  on  rent.  Such  a  use  of  the 
taxing  machinery  would  have  a  decided  influence  on  the 
character  and  organization  of  the  business  world. 

Another  illustration  may  be  given.  Suppose  it  is  not 
possible  to  do  away  with  monopoly  gains  by  general 
laws  or  supervisory  commissions.  These  monopoly  in- 
comes, it  is  urged,  are  imfair.  They  are  not  in  keeping 
with  the  theory  that  free  competition  can  attain  equity 
in  the  sharing  of  the  current  product.  This  being  the 
case,  it  is  urged  that  a  special  tax  should  be  imposed  on 
monopoly  incomes.  Such  a  plan,  if  carried  into  effect, 
would  have  considerable  influence  on  the  way  things  go 
in  the  modern  business  world. 

The  progressive  income  tax,  that  is  to  say,  a  tax  on 
incomes  at  a  rate  that  increases  as  the  amount  of  income 
to  be  taxed  increases,  is  another  illustration  of  the  point 
in  hand.  But  enough  has  been  said  to  make  clear  what 
is  meant  by  making  use  of  the  taxing  machinery  for  other 
than  revenue  purposes.  Nothing  which  government  can 
do  is  more  powerful  in  its  influence  on  the  character  and 
conduct  of  the  business  world,  than  this  proposal  to  cure 
the  evils  of  competition  by  the  use  of  the  taxing  machinery. 
From  two  points  of  view  the  problem  of  taxation  is  a 
problem  by  itself:  From  that  of  the  proper  levy  of  taxes 
in  order  to  make  an  equitable  distribution  of  the  tax 
burden,  and  that  of  the  rprnr^vfll  nf  pi^'tj^^jgir^g  on  industrial 
society  as  at  present  organized,  by  special  taxation.  But 
enough  has  been  said  to  show  the  place  of  taxation  in  the 
modern  business  world. 

§  62.  Conclusion. — The  points  submitted  in  this  chap- 


GOVERNMENT  AND  INDUSTRY  £63 

ter  may  be  made  clear  by  a  cursory  restatement.  The 
impression  which  one  receives  from  Chapter  III  of  this 
treatise,  which  deals  with  the  legal  background  of  in- 
dustrial society,  and  from  the  chapters  which  explain 
the  principle  of  social  control  and  the  workings  of  the 
market,  is  to  the  effect  that  justice  and  efficiency  are 
likely  to  flow  from  the  free  play  of  commercial  forces. 
The  impression  derived  from  our  discussion  of  the  laws 
of  price  and  the  sharing  of  the  product,  is  that  in  some 
particulars  the  principle  of  free  competition  fails  to  produce 
all  the  results  that  citizens  may  reasonably  ask  from  a 
well-ordered  industrial  world.  The  impression  of  the 
present  chapter  is,  that  government,  as  it  actually  exists 
among  English  speaking  people,  sets  before  itself,  con- 
sciously, the  task  of  curtailing  the  evils  that  flow  from 
unregulated  competition,  while  guarding  the  benefits  that 
flow  from  the  acceptance  of  the  free  play  of  commercial 
forces  as  a  principle  of  industrial  and  social  control. 
It  is  this  purpose  that  has  led  modern  governments  to 
enter  on  the  five  lines  of  activity  described. 

First  Factory  legislation  that  has  for  its  purpose  to 
standardize  conditions  of  work  and  thus  determine  the 
plane  of  competition. 

Second.  Those  legislative  enactments  and  decisions  of 
our  courts  which  have  for  their  purpose  the  prevention 
of  combinations  designed  to  throttle  competition. 

Third.  The  assumption  by  government  of  direct  owner- 
ship and  operation  of  such  industries  as,  from  their  nature, 
are  public  in  character,  and  which  do  not  readily  submit 
to  supervisory  control. 

Fourth.  The  development  of  supervisory  administra- 
tion  over   industries   not   satisfactorily   controlled    by 


264  DESCRIPTION  OF  INDUSTRY 

competition.  As  a  plan  of  reform,  this  is  an  alternate  to 
that  of  public  ownership  and  control.  No  clear  line  has 
yet  been  drawn  between  these  two  plans.  Both,  at  present, 
are  a  part  of  the  modern  business  world. 

Fifth.  In  case  the  foregoing  devices  do  not  succeed 
in  the  attainment  of  the  end  sought,  which  is  to  estabUsh 
a  truly  democratic  industry,  there  is  a  tendency  to  use 
the  taxing  machinery  for  the  restoration  of  conditions 
that  seem  to  be  fair  in  their  results. 

No  opinion  is  expressed  on  the  relative  merits  of  these 
plans.  This  chapter  is  written  to  make  clear  the  fact 
that  government  is  an  essential  part  of  the  business 
world.  It  is  a  corporation  organized  for  service  without 
profit  to  itself,  but  a  corporation  in  most  of  its  essential 
features,  quite  as  much  as  a  railway  company  or  a  blast 
furnace  company.  The  relation  between  government  and 
industry  is  one  that  cannot  be  disregarded  by  one  who 
undertakes  to  describe  the  modern  business  world. 


INDEX 


INDEX 


Agriculture,  22 
Aquaculture,  23 
Arkwright,  89 
Ashley,  138 

Banks,  service  of,  30;  relation  to 
a  market,  148;  nature  of  busi- 
ness of,  202;  checks  and  drafts 
of,  206;  discounts  of  and  ex- 
changes, 212 

Bank  notes,  description,  191; 
of  National  Banks,  193;  of 
Federal  Reserve  Banks,  194; 
amount  of  in  U.  S.,  201 

Barter,  difficulties  of  exchange 
by,  177 

Bastiat,  quoted  on  co-operative 
work,  16 

Bentham,  102 

Bridgewater,  92 

Calculations,  money  required 
for,  179 

Capital,  meaning  of,  71 ;  illustra- 
tions of,  73,  74,  75;  money 
not  capital,  77;  maintenance 
of,  78;  building  of,  80;  law  of 
return  from,  82;  valuation  of, 
83;  useless  investment  of,  136 

Cartwright,  90 

Certificates  of  deposit,  195;  in 
circulation,  gold,  201;  in  cir- 
culation, silver,  201 

Coinage,  definition  of,  184; 
standard  coins,  185,  197;  sub- 


sidiary coins,  186;  tokens,  187; 
free  coinage,  189 

Commons,  J,  R.,  34 

Comparison,  significance  in  bar- 
gaining, 219 

Competition,  placement  of 
workers  by,  121;  promotion  of 
workers  by,  123;  adjustment 
of  product  by,  124;  location  of 
business  by,  127;  of  occupa- 
tions, 129;  justice  secured  by, 
130;  wastes  of,  132;  instability 
traceable  to,  134;  useless  in- 
vestments traceable  to,  136; 
of  goods,  161;  between  buy- 
ers, 161;  powerless  under 
monopoly,  169;  influence  of  in 
production  contract,  219;  op- 
posed by  trusts,  239;  not  a 
law  of  nature,  249;  is  a  blind 
force,  250 

Control  in  industry,  meaning 
of,  118 

Co-operative  system,  112 

Corporations,  as  business  units, 
235;  compared  with  partner- 
ships, 236;  number  of  in 
United  States,  238;  voluntary 
associations,  48;  relation  of 
to  machinery,  100 

Costs,  comparative,  129;  rela- 
tion to  prices,  165;  rent  not  an 
element  of,  227 

Crises,  135 


267 


268 


INDEX 


Crompton,  89 

Currency,  Comptroller  of,  193 

Davy,  Sir  Humphrey,  91 

Demand,  measured  by  mer- 
chants, 142;  varies  with  price, 
159;  meaning  of  effective  de- 
mand, 160 

Desire,  decreases  with  satisfac- 
tion, 106;  of  money,  an  excep- 
tion to  rule,  108;  "double 
coincidence  of,"  177 

Diminishing  returns,  law  of,  59; 
proof  of,  62;  results  of,  63 

Distribution,  statement  of  prob- 
lem, 216;  resume  of  process, 
229 

Division  of  labor,  organization 
through,  7;  product  increased 
thereby,  11 

Effort,  law  of,  106 

Employers'      Associations,       as 

agencies  for  bargaining,  244 
Enterpriser,  definition  of,  220 
Exchanges,  facilitated  by  checks 

and  drafts,  206;  by  bank  dis- 

coimts,  212 

Factory  laws,  description  of,  248; 
argument  in  support  of,  249 
Fatigue,  law  of,  107 
Fiske,  John,  232 
Forestration,  24 
Forrest,  J.  Dorsey,  85 
Fulton,  Robert,  93 

Gold,  amount  in  circulation  in 
United  States,  201;  weight  of 
dollar,  201 

Government,  as  protector,  52, 
63,  54;  services  of,  standard- 


ized, 258;  touches  industry  at 
five  points,  263 
Greshams'  law,  197 

Hargraves,  89 

Holding  companies,  239;  two 
uses  of,  240 

Incomes,  from  direct  services, 
224;  from  ownership  of  land, 
226;  speculative,  228;  monop- 
oly, 228 

Individual,  as  business  unit,  233 

Industrial  revolution,  interpre- 
tation of,  85;  relation  to 
power,  86;  progress  of,  88 

Industrial  society,  meaning  of, 
10;  classification  of,  31 

Industries,  classification  of,  20; 
"pubhc  service,"  253 

Inghram,  247 

Instability  of  industry,  134 

Intelligence,  automatic  working 
of  in  industry,  12;  organiza- 
tion of  for  market,  150 

Inventions,  following  1760,  88 

Jevons,  Stanley,  quoted  on  cap- 
ital, 71 ;  quoted  on  meaning  of 
market,  173 

Justice  in  industry,  130 

Land,  meaning  of,  57;  law  of 
return  from,  59;  different  uses 
of,  66;  explanation  of  value 
of,  67 

Law,  no  liberty  without,  34; 
relation  to  eflBciency,  35;  to 
general  welfare,  36;  of  proj>- 
erty,  38;  of  person,  42;  gives 
equaUty  of  opportimity,  45; 
supports  regime  of  contract, 


INDEX 


269 


47;  prescribes  conditions  for 
industry,  49;  provides  super- 
visory and  administrative  con- 
trol, 50,  51;  to  enforce  com- 
petition, 251;  to  exclude  com- 
petition, 253;  to  supervise 
competition,  255 

L^al  frame  work,  of  industry, 
classification  of,  37 

Legal  tender,  190;  facts  respect- 
ing, in  monetary  system  of 
United  States,  201 

Macadam,  92 

Manufactures,  classified  by  out- 
put, 25;  classified  by  material 
used,  27;  classified  by  elements 
of  cost,  28 

Market,  description  of,  138; 
characteristics  of  modem,  139- 
146;  national,  144;  for  staples, 
145;  for  stocks  and  bonds,  146; 
price,  158 

Marriage,  right  of,  46 

Marshall,  3 

Merchants,  service  of,  29,  32; 
retail,  140;  wholesale,  141 

Migration,  right  of,  46 

Mm,  J.  S.,  176 

Mining,  23 

Money,  is  not  capital,  77;  nature 
of  desire  for,  108;  relation  to 
the  market,  149;  medium  of 
exchange,    177;    measure    of 
value,  178;  standard  of  pay- 
ments, 180;  material  of,  182 
discussion    of    coinage,    184 
legal  tender,  190;  paper,  190 
certificates   of    deposit,    195 
value  of,  196;  diffusion  of,  199 
system  of  in  the  United  States, 

•    201;  amount  of  per  capita,  201 


Monopoly,  three  kinds  of,  169; 

law  of  price  for,  168 
Motives,   organization  of,   110; 

comparative  study  of,  111 

Partnership,  as  business  unit, 
233;  business  limitations  of, 
235 

Population,  not  controlled  by 
law,  46 

Property,  in  land,  39;  in  capital, 
40;  in  organization,  41;  in 
consumable  goods,  41 

Price,  points  raised  in  study  of, 
156-158;  the  purpose  of,  158; 
relation  of  to  demand  and 
supply,  159;  law  of  market 
price,  161;  normal,  164;  ef- 
fect of  on  production,  165;  law 
of  normal  price,  168;  law  of 
monopoly  price,  168;  law  of 
speculative  price,  172 

Production,  relation  of  to  the 
market,  142 

Production  contract,  219;  rela- 
tion of  to  interest  and  wages, 
221 

Profit,  speculative,  174 

Rent,  law  of,  65;  law  of  illus- 
trated by  diagram,  69;  not 
an  element  in  cost,  227 

Saving,  as  source  of  capital,  80 

Seager,  216 

Secretary  of  Treasury  report 
1845,  93 

Silver,  weight  in  dollar,  201; 
amount  in  circulation,  201 

Slavery,  compared  with  serf- 
dom, 43;  compared  with  free 
labor,  43;  system,  112 


270 


INDEX 


Smith,  Adam,  156 

Socialism,  contrasted  with  in- 
dividualism, 247 

Specialization,  advantages  of, 
9;  relation  of  to  the  market, 
153 

Staples,  market  for,  145 

Standard  of  living,  effect  of  on 
price,  163 

Tariff,  schedules  in  the  law,  26 

Taussig,  20,  135 

Taxes,  industrial  significance  of, 

259 
Time,  an  element  in  efficiency, 

13 
Toynbee,  Arnold,  118,  131 
Trade    unions,    are    voluntary 

associations,  48;  a  result  of  the 

industrial  revolution,  100, 242; 

an  organization  for  bargaining, 

241 


Transportation,  service  of,  30; 

development  of  by  steam,  92; 

relation  to  market,  152 
Trusts,  239 

United  States  notes,  amount  in 
circulation,  201 

Value,  of  money,  196 

Voluntary  Association,  47;  bus- 
iness integration  realized 
through,  232 

Wants,  as  motives  to  work,  102; 
analysis  of,  103;  classification 
of,  103;  law  of,  105 

Watt,  90 

While,  Horace,  202 

Work,  definition  of,  3;  not  bound 
up  with  pain,  4;  mental  and 
physical,  5;  co-operative  in 
character,  6;  motived  by 
wants,  102 


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